I continue to get questions each week surrounding my use of Option Collars. I like to provide real-world examples of how to implement – and how they work to provide some peace of mind just in case things reverse (up or down).
I have two post-earnings trades and they both utilize a Bear Collar. For the first example, I bring you $MLNX and here is my trade:
- I am short the stock from after hours on 10/17 at 96.7
- The following day, once the market opened, I initiated an October 80/85 Bear Collar for a $.30 credit. What this means is that I am short the October 80 Put and long the 85 Call. This caps my gain for more downside beyond the 80 strike at 79.70 but also protects the short stock by owning the 85 Call
The second example is for $CMG and involves a Bear Collar that was put on using the October 26 weekly options (expire next Friday):
- I am short the stock from after hours at 281.65
- I have covered 1/2 of the position in pre-market at 255 on 10/19
- I have initiated an October 26 weekly 235/245 Bear Collar on 10/19 for a debit of $2 (3.3/5.3) for a 1/2 position. This means I am short the October 26 weekly 235 Put and long the October 26 weekly 245 Call
The key to these trades is really this: once you decide where a floor/bottom is forming, you put the Bear Collar on. Once in place, this allows you to just let the position run and focus on other trades that may need more pressing attention. Sometimes the gain is capped and the position is called away. Sometime you are very glad to own the Call. If price stays flat into expiration? No harm no foul.
Peace of Mind.