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Colin,
to reiterate, this collar strategy of yours can be mildly described as
suboptimal.
Suppose you were about to buy a lottery ticket for the price of $ 5,000. How
would you like it if you learned that you could buy a ticket with precisely
the same risk/reward profile, same expiration, same odds, same potential
profit, same everything, for the price of only $ 500?
You can do exactly that in your collar strategy. As I had tried to point out
in a previous post, a collar is useful only if you *already* own some stock,
and want to protect it against a temporary market decline. Buying this stock
merely for the purpose of establishing a collar is amateurish and an
unnecessary expenditure. It is much cheaper to establish a vertical spread
which can be constructed to be *exactly* equivalent to the collar at a
fraction of the cost.
To illustrate, let us do your APC (Anadarko Petroleum) example at Friday's
closing prices. A collar could have been established by buying 100 APC,
selling 1 June 65 call, and buying 1 June 55 put, at a cost of about $
6,200.
However, you could have done an *exactly* equivalent position by selling 1
June 65 call and buying 1 June 55 call, at a cost of about $ 650.
Don't you think this difference might be worthy of your consideration?
Best wishes,
Michael Suesserott
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