The collar unwind in Starbucks

One of the tactical steps I take in protecting a position is by implementing an Option Collar. I have posted several blog posts on the use of this and wanted to continue those efforts of showing examples on how the hedge is actually unwound.

For this post, I will discuss the unwind of a June 57.5/55 Collar that I put on the long-term account position I had in $SBUX (Starbucks). Here are the details:

  • Long the stock in my long-term account at $53.15 on 5/21/2012
  • S the 57.5 June call (part of collar)
  • L the 55 June put (part of collar)

The cost for putting on the collar was a debit of $.28 on 5/29/2012.

So now what? Before I get into the unwind here, let me list the potential scenarios to a long stock position with a collar and how each would play out:

  • Stock price goes up, above the short call strike and is called away at expiration. Your gain is capped. The long put position expires worthless.
  • Stock price goes sideways into the expiration date. The debit (if that is the case) is the cost you have paid for a LOT of piece of mind. At times I can put on a Collar for a credit so the premium collected is a nice bonus.
  • Stock price goes down. This is where you have several different scenarios to attend to — all depending on where your entry on the stock is compared to the put strike that you own. If the price falls through the put strike, I suggest you follow a normal stop rule on the long stock and work the put for maximum value. It is likely that you can buy back the call at that time as well quite cheaply.

In the case of my $SBUX position, these are the steps I took to unwind the position (all posted on my twitter feed):

  • Buy to Close the June 57.5 call at $.20 (this is to buy back the short call for 2 dimes) on 6/1/2012.
  • Sell to Close the June 55 put at $3.15 on 6/1/2012.

With the actions above, I removed the entire collar thus leaving the long position exposed (beyond my normal trailing stop). The plan now is to monitor closely for a hold near the $52 level. With the stop in place, I can let the position have some wiggle room – given the premium collected with the collar unwind – albeit with a short leash.

If this isn’t clear enough, or have any questions/comments, please feel free to leave them here.

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