How a Collar helps to the downside

I received a few questions this morning regarding my thoughts on $VFC (I am long with a Dec 160/155 Collar) and how I was approaching this current down-trend in price.

I have owned this position for a while (earnings trade) and have done several Option trades to build a cushion for my long entry. I’ve done a few posts about this trade up to this point, but find today to be a good day to show just how this Collar is helping offset the loss on the underlying stock position.

Let’s break it down:

  • Long the stock
  • Short the December 160 Call
  • Long the December 155 Put

Price is currently at 154.5 as I write this so the Put above is ITM (in the money). So how is this Collar really helping? To illustrate, when I sold the Call above, price was nearing the 158 level. I received $2.7 in premium when I sold it. I bought the Put on 12/4 at $1.35 when price broke through the 20 SMA (simple moving average).

So let’s see where things stand now:

  • Price was at 160 yesterday, is at 154 now so a $6 decline
  • December 160 Call can be bought back for $.80 here so a gain of $1.90
  • December 155 Put just went for $3.90
  • So the cushion provided by the Collar is currently $5.80

So the Collar is almost covering the entire decline in price, allowing you to just let the position ride, sleep at night.

One thought on “How a Collar helps to the downside

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