WOW 11

Protecting Your Portfolio with a Collar

Host- Georgio Stoev

Co-Host – Gary Delany (Director, Options Industry Council)

November 25 2015

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Important Information - Saxo Bank

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losses in connection therewith can or will be limited. Trades in accordance with the recommendations in an

analysis, especially leveraged investments such as foreign exchange trading and investment in derivatives,

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Important Information - OIC

Disclaimer. Options involve risk and are not suitable for all investors. Individuals should not enter into

Options transactions until they have read and understood the risk disclosure document, Characteristics and

Risks of Standardized Options, which may be obtained from your broker, from any exchange on which

options are traded or by visiting www.OptionsEducation.org. None of the information in this presentation

should be construed as a recommendation to buy or sell a security or to provide investment advice.

The Options Industry Council (OIC) is an industry cooperative funded by the U.S. options exchanges and

OCC, the world’s largest equity derivatives clearing organization and sole central clearing house for U.S.

listed options. OIC's mission is to provide free and unbiased education to investors and financial advisors

about the benefits and risks of exchange-traded equity options. Managed by OCC, OIC delivers its education

through the Options Education Program, a structured platform offering live seminars, self-directed online

courses, mobile tools, podcasts, webinars and live help. www.OptionsEducation.org

OCC is the world's largest equity derivatives clearing organization. Founded in 1973, OCC operates under the

jurisdiction of both the U.S. Securities and Exchange Commission (SEC) as a Registered Clearing Agency

and the U.S. Commodity Futures Trading Commission (CFTC) as a Derivatives Clearing Organization. OCC

now provides central counterparty (CCP) clearing and settlement services to 16 exchanges and trading

platforms for options, financial futures, security futures and securities lending transactions. www.theocc.com

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Week 11 – The Collar

Construction and Motivation

Research Papers

Summary

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Collars:

Construction and Motivation

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Stock investor has unrealized profits

‒ Wants downside protection for all or part

‒ Cost of put more than willing to pay for insurance

Investor feels some upside profit potential remains

‒ Sells OTM call

‒ Offsets all or part of put cost with premium received

Investor accepts tradeoff

‒ Limited upside worth downside protection desired

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Motivations

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You are holding the underlying stock

On the downside you have a protective put

‒ OTM put purchased (i.e. below current market price)

‒ Gives right to sell shares at put’s strike until expiration

On the upside you have a covered call

‒ OTM call sold (i.e. above current market price)

‒ Upside profit capped at strike price of call sold if exercised

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The Collar: Two Strategies in One

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The Collar

You own 100 shares of XYZ at $60.00.

You feel there is upside profit potential remaining.

You are nervous about the downside.

You are hesitant to buy protective put due to cost

A collar is similar to a covered call combined with the purchase of

an OTM put for downside protection.

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The Collar

XYZ currently at $60.00

Establish a collar

Buy out-of-the-money put

as insurance.

Pay for put by selling out-

of-the-money call.

Combination protective

put and covered call.

Example

Long stock at $60.00

Buy 1 60-day XYZ 55 put at

-$1.25

Sell 1 60-day XYZ 65 call at

+$1.40

Receive net credit:

$0.15

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The Collar

Break-even at Expiration:

Stock Price Paid less Credit

Received

$60.00 – $0.15 = $59.85

Loss limited by $55.00 put bought

Profit limited by $65.00 call sold

+ 5

- 5

55 60 65

0

Long stock

at $60.00

BEP $59.85

Bought XYZ at $60.00

Sell $65.00 call at $1.40

Buy $55.00 put at $1.25

Net credit $0.15

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Refresher: Covered Call P&L

Buy stock at $43.50

Sell 45 Call at $2.30

+ 5

- 5

40 45 50

Long stock at $43.50

0

Call Sold at $2.30

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Refresher: Protective Put P&L

Break-even at Expiration:

Stock Price Paid + Put Premium Paid

$42.00 + $1.55 = $43.55

Maximum Loss:

Stock Price less Strike Price less

Premium Paid =

$42.00 – ($40.00 – $1.55) = $3.55

$355.00 Total

Buy 100 shares ABC at $42.00

Buy 1 60-day ABC 40 put at $1.55

+ 5

- 5

35 40 45

0

Long stock

at $42.00

BEP $43.55

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Avoid exercise of short call

‒ Close short call

‒ Continue to hold protective put bought

No longer feels protection necessary

‒ Sell put bought

‒ Continue with covered call (long underlying; short call)

Beware of exercising long put without closing short call

Roll position

‒ Out and down

‒ Out and up

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Investor Choices Before Expiration

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Collars:

Research Papers

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QQQ Collar Strategy

Szado & Schneeweis

Center for

International Securities and

Derivatives Markets, University of Massachusetts

Autumn 2010

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University of Massachusetts, Amherst

Loosening Your Collar-11 1/2 year results (thru 9-30-2010)

-3%

+185%

+290%

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University of Massachusetts, Amherst

Loosening Your Collar-11 1/2 year results (thru 9-30-2010)

1/3 the risk

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References

Loosening Your Collar: Alternative Implementations of QQQ Collars. Szado and

Schneeweis have updated the data in their original modified collar study through September 30, 2010.

The appendix to the paper finds that a long protective collar strategy using 6-month put purchases and

consecutive 1-month call writes earned far superior returns compared to a simple buy-and-hold strategy

while reducing risk by almost 65%. Download the summary brochure at:

http://www.optionseducation.org/content/dam/oic/documents/literature/files/oic-collar-qqq.pdf

Option-Based Risk Management in a Multi-Asset World. The contagion across asset classes

during the 2008-2009 financial crisis suggests that protective option-based investment strategies such as

collars, when implemented on a wide range of asset classes, could provide portfolios with greater downside

risk protection than standard multi-asset diversification programs. In the recent book, Option Based Risk

Management in a Multi-Asset World, Szado and Schneeweis extend their previous research on the

performance of equity-based collar strategies by considering the impact of collar strategies across a wide

range of asset classes, including equity, currency, commodity, fixed income and real estate. The results of

the analysis show that for most of the asset classes considered, an option-based collar strategy, using six-

month put purchases and consecutive one-month call writes, provides improved risk-adjusted

performance and significant risk reduction. Download the summary brochure at:

http://www.optionseducation.org/content/dam/oic/documents/literature/files/options-based-risk-mgmt-

summary.pdf

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Collars:

Summary

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Using Collars

A flexible strategy. The strike prices of the options bought

and sold can be adjusted.

The call sold helps offset the cost of the put bought.

The strategy brackets the possible outcomes.

‒ The put bought protects the downside.

‒ The call sold caps the upside.

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For next time…

Capstone of Basic Option Strategies (review of strategies, rules and trade set ups)