I’m mentally positioning myself to guard against a bear.

music selection:  “Renegade” — Styx

Ordinarily, on Friday’s I post something at least tangentially related to bonds.  I’m just not seeing anything tasty this week.  I believe in a conservative approach.  That is a big part of why I like selling covered calls.  Give up some upside for lowered risk.  Lately, I’ve been getting even more defensive by buying in the money bull call spreads and bear put spreads.  This has positioned me to earn somewhere around my previous level of income while putting a fifth the capital at risk.  It comes with a price that I can lose 100% of the capital (although I target an early exit at 50% loss.)  Today, I’m going to share another strategy that guards against steep downturns in the market while still allowing a net credit.

Today’s strategy is for demonstration purposes only and I am not making this trade.  What I’m covering is the Collar Trade.  For example, let’s assume I was going to make a covered call trade on ATVI.  Shares are currently trading around 45.50.  A near the money call at the 45 strike and 21JUN2019 expiry could be sold for about 2.50.  This is a really good return but if I am concerned that market could crater 35% during that period, I might want to buy some insurance.

So instead of a buy-write combo order, I could do a collar combo order adding a long put leg that is out of the money.  The 42.50 strike is currently going for about 82 cents.  The whole combo would go for $4,382.  Which is to say the price for the options components is a net credit of 1.68 a share.  If shares stay the price or climb from here, shares will be called away at expiry with a 50 cents short term capital loss.  That still comes out to return of 2.69% (22.86% annualized.)

Let’s say shares fall 30% during that time.  The share price would be 31.85 and the calls would expire worthless.  The puts would be well in the money and be worth 10.65.  We would sell our shares at 42.50 losing 1.32 per share instead of losing 11.97 per share.  That is a 3.01% loss making the range of outcomes bound by a 2.69% gain and a 3.01% loss.  I would still be making a good return and gain protection from a catastrophic loss.

I’m watching the yield curve, GDP numbers, and unemployment rate closely right now.  There is probably no more than about 12 months of these go-go times left.  I’ll be looking to get defensive BEFORE the bottom falls out.

In other news my FXI bull call spread moved out of the money and traded below my 50% loss threshold.  I sold for 28 cents and booked a 442 dollar loss on 918 capital at risk (about 48%.)  This nominal loss is however much lower than if I had put my usual 5 to 10 thousand at risk.  I live to trade another day and will replace FXI with another in the money debit spread on Monday that I think will be a high percentage trade.

Devour your prey raptors!

Another Protective Strategy Using Options

Never miss another opportunity to devour prey!

2 thoughts on “Another Protective Strategy Using Options

  • May 15, 2019 at 10:03 pm

    If I was on the super-cheap IB platform like you, I’d strongly consider condors. Adjustment of the unchallenged side can generate revenue or keep you at the point of maximum decay.

    • May 15, 2019 at 11:18 pm

      I’m already doing some studying and research on utilizing condors where I am neutral on a stock and want to add market neutral exposure. Great minds think alike!


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