I did a review last week for the open positions that I have that include January Option pieces. One of the trades is a long stock position in $DDD where I have a January 60/55 Collar.
Let me break this down for those that are not familiar:
- I am long stock
- I am short the January 60 Call
- I am long the January 55 Put
I had noted that this trade has the gain capped (price was above $60 strike) to end the week, and this continues to be the case. So, what is a trader to do when presented with this situation? One important part of the process is to understand the scenarios that can play out once the gain is capped. Here are a few ways this can resolve by Friday expiration:
- Stock is called away (rare, but happens so this can be decided for you)
- Price stays above $60 giving you 2 choices on Friday: buy back the short call or let the stock be called away
- Price drifts back towards the $60 strike, a Pin if you will, giving you a chance to buy the Call back cheaply as Theta evaporates
- Price falls back under $60 strike and the Collar expires
