I have a long stock position in $ALXN and as part of my risk management I initiated an Option Collar for the month of August. Trade details:
- Long stock at 98.45 on July 25, 2012
- Sell to Open the August 110 Call at $3.30 on July 27
- Buy to Open the August 105 Put at $2.35 on July 30
The last two steps complete what is known as an Option Collar. This Collar does 2 things for the long stock position:
- It caps the gain at 110.95 (strike of Call plus difference in premium collected from Call sale and Put buy)
- It protects on any move below $105 all the way up to expiration
Now along the way, stock prices move up and down – the ebb and flow of the market – so there are trading days where you can consider closing one piece. I do this frequently, and with $ALXN I did have the opportunity this week:
My rationale here is simple: once an option that I have sold reaches a level where I can keep 80% of the premium collected, I consider buying it back. In this case, the goal is to un-cap the gain potential for the long stock position. Once I do this, I remain long the stock and long the August 105 Put (protects any downside move).
As noted above, the ebb and flow of the market brings me to today – a nice GREEN day across many stocks and $ALXN is not left out of the action. So, I began to look at selling the August 110 Call once again.
Why? If price continues to move up, then that means it is moving away from the $105 strike of the Put – I am only protected from there down. So, I am interested in collecting some additional premium that I could use in the future to move up the $105 strike Put to the $110 – as an example.
At the moment my net cost for the August 105 Put is a credit of $.30 and I have sold the August 110 Call for $2.75 today. This brings the premium collected now to $3.05 which caps my gain at $113.05 by August expiration.