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Colin,
to begin with, a "collar" usually is not a reasonable strategy to establish
for its own sake. It is a hedging strategy, mainly used to hedge stock you
*already* own, against the risk of a temporary decline. You would do this by
buying puts, and you would finance the cost of the puts by selling calls.
This then results in the position called a "collar" or "fence". Once you
deem the downside risk to be over, you would unwind this position again
(i.e., get rid of the options), in order to have the renewed chance of
upward profitability for your stock.
If you want downside protection only for your existing stock, with all
upward chances of profitability intact, then don't do a collar; just buy
puts instead. Of course, the capital outlay will be much greater then - no
free lunch again!
Now once this is understood, let us discuss the original question. You
wrote:
>an assumption that I'd like test is that the price of the stock
>will not increase within 30 days by more than the strike of the
>call minus the price at which the stock as purchased.
This statement sounds as if it were a great boon for the "collar" if the
price of the stock would remain below this limit. But in reality, it doesn't
make much of a difference (actually, it would make even *less* profit). As
long as the collar is on, you won't make much profit anyway, whether the
price of the stock goes up past the call strike or not. And, OTOH, the small
profit you *can* make with the collar will remain even if the stock price
should rise further. If your concern is upward profitability, simply don't
do a collar.
As for your question, "...in statistical terms what is objectionable about a
collar in this context?" - the answer has nothing to do with statistics. The
simple fact is that a collar binds a lot of capital to the purchase of the
stock in the first place, plus commissions and the costs for the options. If
you really found this position desirable, you would go for a simple vertical
bull spread - an exactly equivalent position which could be done at about a
tenth of the cost.
And if you wanted greater upward profitability along with downward
protection, there are many good strategies available depending on your
market outlook - long straddles, ratio spreads, diagonal spreads, back
spreads, or even the simple purchase of calls.
Regards,
Michael Suesserott
-----Ursprüngliche Nachricht-----
Von: cwest@xxxxxxxxxxxx [mailto:cwest@xxxxxxxxxxxx]
Gesendet: Thursday, May 24, 2001 20:09
An: Omegalist
Betreff: RE: need some ideas to (dis)prove an assumption
A more specific example could be to buy a stock, buy a put and sell a call,
both a strike away from the price of the underlying. A typical collar. An
argument against collars is that they inherently limit profitability of any
increase in the price of the stock above the strike price of the sold call,
which is correct. However, an assumption that I'd like test is that the
price of the stock will not increase within 30 days by more than the strike
of the call minus the price at which the stock as purchased. If this
assumption is correct, then in statistical terms what is objectionable about
a collar in this context?
I'm searching for ideas on how to corroborate a generally accepted
assumption that option premiums decay faster than an underlying may change
in price (in relative terms). For example, given a stock priced at $50 and
its 55 call with 30 days to expiration priced at $1.00, how many times does
the option expire at a premium of $0.00 and how many times does it expire
with an intrinsic value. I'd expect underlyings with different volatility
levels to have different stats, but that may be proven to the contrary.
Thanks in advance.
Colin West
cwest@xxxxxxxxxxxx
303-785-1702 (direct)
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