I often get great questions from twitter regarding my trading process that reminds me how limiting it can be to give proper context in 140 characters. It is for that reason that I try to provide blog posts with more detail as often as I am able.
For this post, I thought I would provide a few simple notes on how an Option trade can “morph” when one piece is eliminated. To start, let’s look at a normal Option Collar:
- You are long the underlying stock
- You sell an upside Call on this stock
- You buy a downside Put on the stock
- This works great if you expect steady move up and/or you want to sleep at night with owning that Put
Now, one way this trade can change is if the stock comes under pressure and you elect to sell the underlying long stock position. You then end up with a short Call and a long Put = this now becomes a Bear R/R.
Now for the Option Bear Collar:
- You are short the underlying stock
- You sell a downside Put on this stock
- You buy an upside Call on the stock
- This works great if you expect steady move down and want to sleep at night with owning that Call
Now, one way this trade can change is if the stock begins to find some footing, stakes get put in the ground, and you elect to cover the underlying short position. You then end up with a short Put and a long Call = this now becomes a Bull R/R. I do this a lot when I want to play a bounce, mean reversion trade.
A trading process that allows you to switch gears is important in my opinion as price does not move in a straight line. Having flexibility in a trade is paramount, as well as controlling your bias.
I hope 2013 has started well for you and thanks for reading.