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

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May 9, 2006 9:50 pm

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?

May 9, 2006 10:28 pm

LMAO!!!!  

May 10, 2006 8:05 am

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

May 10, 2006 10:29 am

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

May 10, 2006 11:39 am

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

May 10, 2006 11:46 am
Gone Indy:

"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.

May 10, 2006 5:05 pm

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.




May 10, 2006 5:40 pm

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?

May 10, 2006 6:03 pm
Indyone:

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.





May 10, 2006 6:07 pm

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.



May 10, 2006 7:02 pm

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? 

May 10, 2006 7:40 pm

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.

May 10, 2006 11:43 pm

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!

May 11, 2006 4:16 pm

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.

May 11, 2006 4:37 pm
Farmboy:

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?

May 11, 2006 5:19 pm

successroom1


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


May 12, 2006 9:19 am

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.

May 12, 2006 12:54 pm
Revealer:

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?




May 13, 2006 11:02 am

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.

May 17, 2006 10:57 pm

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.