There are many scenarios that can play out with a stock trade. I thought I would focus on the Option Collar – and what can happen when you get “capped”. I’ll add a comment here first about this “problem” with a Collar: there are many other problems in an Option trade that are not as favorable to the P&L (there are gains here) so I don’t mind being in this situation. It is solvable.
Now on to some examples. I currently have existing trades on with $TRIP & $DVA where I am capped on the long stock piece by short Calls:
- $TRIP I am long stock at $72 (since 8/15/2013) and have a February 85/82.5 Collar
- $DVA I am long stock at $54 (since 10/11/2012) and have an April 62.5/60/50 Collar PS
The post-Earnings moves on both of these stock has been up and well above the Short Call strike of the Collar. So now what?
Here are some paths I can take:
1) Do nothing. The gains are currently capped – and the bulk of the gains protected below – so just let it ride. The stock could be called away at any time
2) Adjust the Collar (or Collar PS) to an expiration further out. I will do this in $TRIP next week but no plans to this on $DVA (it is in the IRA)
3) Close the trades