Good morning lovlies, TGIF! I thought I’d start posting a little again on my collar strategy. Life has been hectic, March 1 I executed on a move to Iowa, regretted the house purchase from the first minute I took possession. Regretted being in Iowa at all. Desperately missed the mountains. Aug 30 executed a move back to Colo, without selling the Iowa house. I’m finally settled back in Colo, though still trying to sell Iowa. I am SO HAPPY to breathe Colorado air again.
So…re trading. I started doing 13-week Tbills over a year ago. The T-bills made me realize that as I’m older, I have less appetite for risk. They also taught me patience. I would make (risk free and state-tax free) as much in 13 weeks as a 1-week Jade Lizard can turn over. But, with a ladder, the risk-free money was rolling in every week. The T-bill rate hit a high last December then started dropping. Once it got close to 2% I realized I needed a new low risk strategy.
So I went back to the #collars . This is a slow, steady, low volatility, limited risk strategy. My goal is to net out about 3-to-6 times the Tbill rate. So 6 to 12% a year. The return-on-risk is much higher, around 50-100% due to risk being so controlled.
I have a very specific process I follow that seems to be working well, that’s why I’ll call it #SueCollars
I use the term “collar” pretty generically. Some would call this “married puts.” I also call it a “rev con” (Reverse Conversion). To me they are all interchangeable. The premise being that there is a stock position, a short call, and a protective put.
My process is 1. Buy stock (I have a tight list of high yielding stocks with good balance sheets—I’m limiting buys right now to PEP, WMT, VZ, CMCSA, CSCO, EBAY, AMD, INTC, BX, MSFT, TGT, UPS, JPM, TGT). I also size every buy for the same amount of stock risk, i.e. all of them around $30K in stock for example. That way capital allocation across tickers is roughly equal.
2. Sell ATM calls around 45 days out. Collect the max you can
3. Buy OTM put 22 days out, targeting 1/3rd of the premium collected on the calls for the buy-price. The thought being that the calls can finance a couple rounds of puts, with enough left over on calls for net profit.
Here is a trade I put on today in CMCSA:
1. Bought 600 shares @ 45.02
2. Sold Nov 22 45 call @1.46 x6
3. Bought Nov 1 43 put @ .46 x 6
Net delta is 145 on 600 shares….so it’s still a bullish trade, but look at all that risk control! Risk is reduced by 75% (obviously any time risk is reduced, profitability is reduced, but remember my benchmark is the 13 week t-bills).
At the outset my max risk on this trade is $612 if there’s a crash. I calculate max risk this way: (600 * 45.02)-(43*600)+(.46*600)-(1.46*600). Basically (stock risk) less (put protection) plus (put cost) less (call premium). Max gain on this trade is $590.88. Roughly with dividends this can yield about 10% a year with pretty good risk control.
There’s a lot of nuance with this trade that I’ll try to capture
–Most people do shorter dated short calls and longer dated puts, I found the opposite works well to finance the puts. On a down swing, the shorter dated puts are a gamma play, they can just explode in value, and longer dated calls very quickly decay, so it’s very nice for collecting realized gains.
–When the protective puts at least double in value (sometimes I can get 7x on them) then I’ll roll everything down. I’ll take profits on the puts and short calls, roll calls to a new 45 DTE ATM and buy new puts. On a big downdraft it’s hard to get new puts at 1/3rd the call value, since these are strong companies I’ll do a very wide put spread to reach the price target. On a bounce it’s easy to buy back the short put and re-establish the full put protection. These rolldowns really do a lot to keep pace with the stock decline.
–A lot of these stocks run up into ex-div and it can be hard to hold the shares. The big thing to always remember with ex div approaching…you CAN be ITM on short calls into ex-div as long as EXTRINSIC IS MORE THAN THE DIV. People tend to freak about ex div and ITM short calls, but it’s an easy rule to remember. I’ve found placing the short calls a couple weeks later than ex div can really help with holding the shares through ex div to collect the dividend. VZ has always been tricky to hold into ex div.
–Once the extrinsic is all gone on short calls I used to self-assign on these to avoid assignment fees….but all that is gone now w/ TDA, no more assignment fees!
–On ITM short calls with no remaining extrinsic, sometimes I’ll roll them up (debit roll) but mostly I take the profits and wait for a down day to re-establish positions.
–I love Fuzzie’s approach of using short puts to re-establish after losing a covered call position but mostly I just re-establish with new stock positions since I’m all about risk control on these.
I’ll keep posting updates on this, and when new positions are established.
Everyone have a safe weekend.