No "collar"--Can't play @ my club

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Revealer's picture
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Joined: 2005-02-13

Here's a start for the "buy and hold" crowd. (Does Liquidate and Transfer still count for "buy and hold") Anyway, here's the scenario.....Had a retired exec from one of the recently strong HEAVY company stocks call me and was nervous about protecting his profits on mutiple thousands of shares of his highly appreciated stock (cost basis about 8% of current price). I suggested a costless collar...sold out of the $ calls to provide capital to purchase out of the $ puts. Put on the position and he was extemely relieved. Now, let's just imagine the conversation if @ jones: "Well, Mr. Bigbucks we don't believe in such folderol as option "stuff", but let me show you this terrific mountain chart on ICA." Suppose that'd work?

compliancejerk's picture
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Joined: 2004-12-03

LMAO!!!!  

successroom1's picture
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Joined: 2006-05-02

Don't forget the 30 year bond along with the mtn chart........

Indyone's picture
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Joined: 2005-05-31

You forgot the obligatory Putnam/Van Kampen fund and four blue chip stocks...MSFT, GE, DELL, and ...LU?!!

Gone Indy's picture
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Joined: 2005-12-02

"We don't trade options because they are just too risky"

successroom1's picture
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Joined: 2006-05-02

Gone Indy wrote:"We don't trade options because they are just too risky"
I think onion head just does'nt understand options Buy and Hold and pray to god that nothing ever changes in this world.

Farmboy's picture
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Joined: 2005-11-02

Everyone seems to be framing this trade a success. It isn't my defense of "buy and hold" but something rather obvious;
This position could still go south, especially on a relationship point of view. You might no think so but there is huge time premium in this trade. Theta death is slow but certain in many cases, and options are zero sum net game + commissions. The stock could get called and those premiums could be just a subtraction of client principle. If you think the numbers are small and the results positive for you wait and see where that client goes when the trade is net negative and the stock is gone. Your best case is if the stock falls plenty, then its income tax rates on the hedge and he still may not sell the stock.
 
 
 

Indyone's picture
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Joined: 2005-05-31

Farmboy, you talk more like a doctoral candidate than a farmboy.  I'm not certain if I understand your logic here, so I'm seeking some clarification/education.  Sure, I understand that the stock can appreciate and be called away, limiting profit potential, and if the position goes south, the puts will gain offsetting the loss in the stock position.  Too, the collar described here will expire and need to be renewed if the client wants to maintain the protection, will cost commissions each time, and only provides protection beyond the range of the collar (i.e., the stock can fall a few dollars and the put options may still not be in the money, depending on how tight the collar is.)
I'm sure not saying you're wrong here, as I suspect you know more about the subject than I, but all that being said, if a client needs temporary protection for a large, concentrated position that the client is not quite ready to sell for whatever reason, and is unwilling to pay for the puts, what would you suggest?

Farmboy's picture
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Joined: 2005-11-02

Indyone wrote:
I'm sure not saying you're wrong here, as I suspect you know more about the subject than I, but all that being said, if a client needs temporary protection for a large, concentrated position that the client is not quite ready to sell for whatever reason, and is unwilling to pay for the puts, what would you suggest?

The trade could work, I'm just taken back by the bravado of a zero sum activity as if the broker discovered some earth shattering investment.
Maybe if the client really needs to cut his risk he should just sell and diversify and needs an adviser to tell him the hard facts why. The collar cost annualized could be expensive and disappointing to all involved. You can't prove a position like this abstractly so it isn't correct to be bragging about it, the broker sounds a little ignorant while he puts down "buy and hold". That was my only point.
All platitudes fail in this business, that's why I don't live with absolute views you see all over this forum; "buy and hold", "active management", "Fees good commissions bad", "lowest cost wins", "My firm is better" etc. etc. All very limited in the head.
 
 
  
 

Farmboy's picture
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Joined: 2005-11-02

Keep in mind indy, the collar could still lead to liquidation. Perhaps more adversely or better for those involved. It's a poker game system and you have to wonder if the client of the broker involved understand that fact.
 
 

Revealer's picture
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Joined: 2005-02-13

Farmboy: What do you suppose the term COSTLESS collar means? Did you read the part about huge cap gain? Did you read the part about client nervous? My experience with rich people is that they didn't get that way by being slow to understand things. Now for horror of horrors.....what do we do if calls are OMG EXCERCISED?? Your answer please. Deal or no deal? 

rightway's picture
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Joined: 2004-12-02

Don't collar the whole thing.  Lets say it was 2 million dollars
worth.  Collar a million, just write calls on a quarter million,
and leave the other half million long.  If the price moves past
the strike and the stock is going to get called away bring in some more
long shares, sell more calls at a higher strike to pay for buying the
calls back.  This buys a little time anyway.  If you think
the stock is going to rise beyond the strike the market is giving for a
good call premium, don't write the calls at all, just spend the money
to buy the put as an insurance policy.

Writing calls and buying protective puts are very basic ways to to some
creative things, but one big fat collar is not always the best thing.

Soothsayer's picture
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Joined: 2005-02-24

Right on, Rightway.  There's no race to get to a conclusion one way or the other.  The highly appreciated position probably didn't get that way overnight, so you don't have to be a hero all in one day either.  If Rightway didn't work at ML, I'd refer my parents to him!

Farmboy's picture
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Joined: 2005-11-02

In different words Rightway captured my doubts.
The point Revealer is that the trade could reflect a dangerous ambivalence about the reality of the position. When the many different outcomes actually happen the reality I and others are pointing at might come into your head as well. Maybe like a brick falling on it.
I'm glad you made a few bucks on the collar and glad you weren't at Jones to block you. I hope it works out but you seemed unaware of the downside which is why I and others commented.

successroom1's picture
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Joined: 2006-05-02

Farmboy wrote:
In different words Rightway captured my doubts.
The point Revealer is that the trade could reflect a dangerous ambivalence about the reality of the position. When the many different outcomes actually happen the reality I and others are pointing at might come into your head as well. Maybe like a brick falling on it.
I'm glad you made a few bucks on the collar and glad you weren't at Jones to block you. I hope it works out but you seemed unaware of the downside which is why I and others commented.

Farmboy....were you an evangelist before becoming an employee?

Farmboy's picture
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Joined: 2005-11-02

successroom1
Actually I didn't think I was the one with the robes on speaking to the unwashed here.
 

Revealer's picture
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Joined: 2005-02-13

Farm: You haven't answered my questions. Less deflection, more direction please. BTW, if you're glad I'm not @ jones....I am REALLY glad.

Farmboy's picture
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Joined: 2005-11-02

Revealer wrote:Farm: You haven't answered my questions. Less deflection, more direction please. BTW, if you're glad I'm not @ jones....I am REALLY glad.
Let's hope the client is better prepared than indicated by the initial post if the collar goes off. Maybe this was a tactic to get right where any Jones broker would have been forced to decide up front if they didn't have the collar option.
My thought when I read it (and it may not have been written well) was that it was a wishy washy trade based on whimpy opportunistic advice and client ambivalence. Often, not a good formula for either in the long run.
Is that clear enough?
 
 
 

Revealer's picture
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Joined: 2005-02-13

Farm/Boy: Nope. You haven't answered my question. "What happens when horror of horrors OMG the calls (may) get excercised." I really don't care about your (mis-guided) concern over my client relationship, I want to know if you know the answer to my question. You can look it up if you want.

Revealer's picture
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Joined: 2005-02-13

Let's hear it for "dangerous ambivalence" after the past week or so. Costless collar is just what it says.....protection for a highly appreciated security @ no cost to the client. Theories only work in the classroom. BTW, was reading the most recent report on ECA (look it up) and they employ costless collars on their 1 yr. out production. Send them a message about their wimpy opportunist positions.

rightway's picture
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Joined: 2004-12-02

Running Calls on positions is interesting.  Many times the clietns
do not want to sell the stock and you end up rolling up the calls if
they are in the money.  This, of course, takes away the call
premium on the initial contract.  Clients get excited when they
don't have to sell the stock, and freak out when the stock rises and
they may get called out.  This is counter-intuitive in that you
get mad when the stock pops up and releaved when the market takes the
price down. 

Perhaps a good psyche hedge.

Revealer's picture
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Joined: 2005-02-13

Rightway: You ever actually been excercised out of a highly appreciated position? That was the question I asked of Farm/Boy. What do you do then? Your answer please....Deal or no Deal?

rightway's picture
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Joined: 2004-12-02

Yes I have.  If you run a covered call strategy from cash, ie buy
a stock, write a call and give it up on the third Friday and walk away
with your apprecitaion, dividend, and call premium it is easy...clients
are OK with that.  It is when you are holding a large concentrated
position that they do not want to sell that the problem comes up. 
Sometimes they are OK with selling it, especially in non taxable
accounts, but generally it is a problem when the option approaches
expiration and it is in the money.  Rolling it up is usually the
answer.

Revealer's picture
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Joined: 2005-02-13

Rightway/Farmboy: Obviously you don't know the way to avoid excercise and sale of the HIGHLY appreciated position. Simple, you move the excercise to a "short acct." thereby creating a short against the box. At that point, you have until the cows come home to decide what to do. Just was waiting to see if you could come up with the answer instead of preaching to me about my client relationships.

rightway's picture
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Joined: 2004-12-02

Don't pick a fight sport, you will loose.

Revealer's picture
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Joined: 2005-02-13

I don't come here to fight. Do you like to fight when you can't defend yourself on knowledge and experience?

Farmboy's picture
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Joined: 2005-11-02

Revealer wrote:I don't come here to fight. Do you like to fight when you can't defend yourself on knowledge and experience?
That's a laugh.
 

Farmboy's picture
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Joined: 2005-11-02

Revealer wrote:Rightway/Farmboy: Obviously you don't know the way to avoid excercise and sale of the HIGHLY appreciated position. Simple, you move the excercise to a "short acct." thereby creating a short against the box. At that point, you have until the cows come home to decide what to do. Just was waiting to see if you could come up with the answer instead of preaching to me about my client relationships.
This a smoke and mirrors position. It only delays the inevitable and if there are dividends they are gone. If the stocks runs your in the same boat as I and other indicated.
Your insecure demeanor revealer is, in your case, justified.
 
 

Revealer's picture
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Joined: 2005-02-13

Talk about the original question(s) rather than making personal attacks. Farm/Boy,dividends on a short against the box offset each other. Go find someone else to back up your scenarios. All your attacks are making me insecure. (BTW the position is working out just great, thank you.)

Revealer's picture
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Joined: 2005-02-13

Revealer wrote:Here's a start for the "buy and hold" crowd. (Does Liquidate and Transfer still count for "buy and hold") Anyway, here's the scenario.....Had a retired exec from one of the recently strong HEAVY company stocks call me and was nervous about protecting his profits on mutiple thousands of shares of his highly appreciated stock (cost basis about 8% of current price). I suggested a costless collar...sold out of the $ calls to provide capital to purchase out of the $ puts. Put on the position and he was extemely relieved. Now, let's just imagine the conversation if @ jones: "Well, Mr. Bigbucks we don't believe in such folderol as option "stuff", but let me show you this terrific mountain chart on ICA." Suppose that'd work?

Revealer's picture
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Joined: 2005-02-13

Revealer wrote:Farmboy: What do you suppose the term COSTLESS collar means? Did you read the part about huge cap gain? Did you read the part about client nervous? My experience with rich people is that they didn't get that way by being slow to understand things. Now for horror of horrors.....what do we do if calls are OMG EXCERCISED?? Your answer please. Deal or no deal? 

Farmboy's picture
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Joined: 2005-11-02

Hope it works out, it can even if you're clueless to the points made. It's a zero sum transaction less your and the dealers fee. It sure doesn't seem like you get it at all but enough said.
You can't refute a platitude (buy and hold) with another (derivative trades add value). There is no more logic in your statement and it's kind of amazing you can't get it through your head or that the client is really informed listening to you blather on like this.
 
 
 

OldDog's picture
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Joined: 2005-07-21

How about asking if the client was properly educated/positioned first? A costless collar can be a quite appropriate technique, especially if the client wants to see how the stock does for another year or so. So can a prepaid forward sale, primarily if the client wants to diversy but keep some upside on the initial position. You can also sell a progressively larger number of calls (i.e. on a 100,000 share position, first sell 100 calls just out-of-the-money. If it's above strike just before expiration, sell 200 calls to pay off the first 100, etc etc) to sell out a position at a higher target price (and the client gets paid the premiums if it doesn't go up, and yes you give up downside protection.)
Point is, many techniques can be appropriate. Only outlining the particular strategy without discussing the client's situation is like 2 blind men describing an elephant- the fella at the trunk and the fella at the tail may describe two totally different animals, but they're both right.

Revealer's picture
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Joined: 2005-02-13

FB,RW,OD: If you boys can scrape up 4 beans, buy a Barrons and read page 20 this week's issue. After reading the article, send attack messages to them.

Farmboy's picture
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Joined: 2005-11-02

Revealer wrote:FB,RW,OD: If you boys can scrape up 4 beans, buy a Barrons and read page 20 this week's issue. After reading the article, send attack messages to them.
I didn't attack the collar "as if I know best". I did point out the obvious (what should be obvious here anyway) which seemed to be lost on people who are critical of "buy and hold" and citing a collar as refutation of that investment concept. Hedging is no more an absolute solution than buy and hold. It isn't rocket science in the case of hedging since it involves derivatives and the end result must always be zero, similar to poker with house commissions on every player. Sure the risks changed for the short-term but consider the play over the long-term for all players, no net winners and costs that eat away. Add to that people shouldn't waffle into selling positions through option obligations, this was speculation based on how the post read. If I was wrong I apologize. People who are nervous about a position might be just as correct as the collar in biting the bullet and selling the concentration rather than game it with the collar. I acknowledged the collar could work and I didn't wish to appear as if I was attacking "collars" in general, again I apologize if that what was taken from my post.
You can't refute a platitude with another platitude was my main point.

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