Protecting a long stock position with Options

Options can be a tremendous tool for a variety of situations. What I would like to discuss in this post is the use of an Option Collar to protect a long stock position. I currently have a long stock position in $QIHU – long at $97.80 since 01/31/2014 (for clients). I have done several Option trades in conjunction with this long stock and currently own an April 11 weekly $110 Collar:

QIHUIn this latest adjustment on 03/21 I Sold-to-Close the Mar $120 Puts I owned (expiration was that day) and added an April 11 weekly $110 Collar. This was done for a nice credit due to the long March Puts being In-the-money (ITM). The Options Net of $10.19 is booked gains on the trade.

So let’s take a look at what has happened since this adjustment:

QIHUAs you can see above on the Daily chart that the stock took a nosedive from the 50 SMA before finding some Support at this Pivot area on 03/27. The stock piece has obviously lost value but let’s see how the Collar has helped offset that loss:

closing bid/ask of the April 11 weekly Options on 03/28:

  • Short April 11 weekly $110 Calls:  $.55/$.75
  • Long April 11 weekly $110 Puts:  $15.10/$15.90

This Collar has 2 weeks until expiration.

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