Riskless Collar (Part 3)

Today I continue review of another “riskless collar” article by a now-defunct service called ChangeWave Options.

     > LONGER-TERM PUTS CAN EQUAL SHORTER-TERM PEACE OF MIND

In my experience, ALL CAPS are a red flag for marketing/advertising material. Have your dissection tools at the ready.
     >
     > One of my favorite strategies is… a “collar…” spread… that helps
     > you to preserve profits on a stock that’s made some significant gains…
     >
     > …we’re buying put options as the first half of the trade. But the
     > second half of the trade… encompasses selling call options against
     > those long puts…
     >
     > For example, a stock that keeps on moving upward is Apple (AAPL).
     > To “collar…” 1,000 [shares of] AAPL, which is trading at $181…
     >
     > 1. Buy 10 AAPL Jan (2009) 180 Puts
     > 2. Sell 10 AAPL Jan (2008) 195 Calls
     >
     > Notice that I went… out into 2009 for the Jan puts at the $180
     > strike price. Not only does the long put position protect us from
     > a downward move as AAPL moves up, but it does so for a year…
     >
     > GET ‘SOLD’ ON THE IDEA OF SELLING CALLS AGAINST YOUR PUTS
     >
     > Notice that we’ve gone with calls that have a closer expiration date.
     > The goal with the collar strategy is to collect premium from those
     > short calls every month or so as you’re riding this trade till the
     > later expiration date of the puts.

This is both the goal and the prerequisite to make this trade profitable. How can this be threatened?

     > If you were to sell the AAPL Jan 195 Calls today, you could collect
     > $10.80 a share… But here’s the magic: If AAPL doesn’t trade… to
     > $195 by… Jan [expiration], this… premium… stays in your pocket.

“Magic” is a great buzzword.

     > Assuming these… short calls expire OTM, you keep that money and,

“Assume” is to make an ASS out of U and ME. Look sharp: are we missing something here?

     > once again, sell the calls at that strike price (or higher, if the
     > stock keeps climbing) each month. You might just be pocketing
     > premium again and again!

Sounds great!

     > ‘PUT’ THE ‘CALL’ OF EXTRA PROFITS ON YOUR WISH LIST

Sounds really great!

     > But back to those long puts — what you pay to buy those puts should

Wait a moment… what about mitigating factors to our plan for selling calls every month?

     > come out of the profits you make on the short calls. Those puts are
     > going for about… $34,000 to cover your thousand shares…
     >
     > That insurance may seem expensive, but look at it this way — you
     > spend $34,000… to buy those puts, but it’s a one-time expenditure…
     > a reasonable “life insurance” contract… for the next year.

We will have to wait until next time to find out about potential barriers to selling calls every month.