Protected buy-write

[tradermic]

Hi all!

I am planning to do some protected buy-writes (collar) trades for a near to 0 risk (with LEAP options). What brokers do you know that provide these long-term options?

The book I read the strategy from is 6 years old. Are these still possible in the market now?

And why don't people do this to collect yearly dividend from the stock instead of putting it in a bond or savings account?

Thanks.

 

[sss3d]

I recommend optionsxpress, if you're interested, PM me, and I will give you my affiliate link.

The issue is that sometimes, the stock can go down in price, and you will lose more money from the stock, than you would make it if you sold the leap.

The trick is to find quality stocks that have a chance of rising in price in the future.

One area is oil, and gas exploration.

Take a look at: http://monitorstocks.net/blog/2011/06/05/options/selling-covered-calls-on-atpg/

Most people do not understand how options work; so they would rather just put it into a bonds account.

Also, let's say that suddenly a new 1 in 1000 chance, that there's a new advancement in wind technology, then the stock of ATPG could fall.

A lot of people were trading during the financial crisis, by selling puts, or selling covered calls on stocks such as Wells Fargo believing they would never fall, but they DID and a lot of people lost their entire savings.

On the other hand, if you wrote a naked call credit spread, if the stock tanks, you wouldn't lose anything But then you would be playing a volatility game in that sense, and you would lose money when the stock price rise above your strikes.

 

[tradermic]

The issue is that sometimes, the stock can go down in price, and you will lose more money from the stock, than you would make it if you sold the leap.

Most people do not understand how options work; so they would rather just put it into a bonds account.

Also, let's say that suddenly a new 1 in 1000 chance, that there's a new advancement in wind technology, then the stock of ATPG could fall.

I mean buying the stock, selling a call and buying a put. Then the risk is only: stock price + put premium - put strike - call premium. It can be a 0 risk trade, but are they possible now?

 

[Martinghoul]

Anything and everything is possible... It all depends, but, one thing for sure, there's no free lunch (e.g. you can't "collect" dividends this way).

 

[tradermic]

Anything and everything is possible... It all depends, but, one thing for sure, there's no free lunch (e.g. you can't "collect" dividends this way).

Why can't you collect dividends?

 

[Martinghoul]

Why can't you collect dividends?

You will collect a dividend on the stock, yes, if you're long it. But it's not gonna be a free lunch.

 

[sss3d]

I mean buying the stock, selling a call and buying a put. Then the risk is only: stock price + put premium - put strike - call premium. It can be a 0 risk trade, but are they possible now?

The put and calls are not the same price sometimes. Usually there is a market bias in one direction.

If they were possible, someone would have probably traded them and it's gone now.

How much do you have to invest anyways?

 

[hoodoo man]

I am planning to do some protected buy-writes

In this type of transaction, you do the following trades:
buy 100 shares
sell 1 call
buy 1 put, same expiry as call

Buying the 100 shares and selling the call gives you a position equivalent to a short put.

So you have
short 1 put
long 1 put, same expiry

So this gives you a vertical spread. Depending on your strikes, this is a bullish or bearish position. Using the same strikes for your synthetic short put and your actual long put gives you a net flat position, which is "zero risk" but you've just paid 3 lots of vig. What are you trying to achieve with this?

I had never heard of "the protected buy-write" so I 'googled' it. One of the first results was this document:
http://www.globaltradingedge.com/PBW.pdf
Funny, isn't it?

 

[daveyc]

while collaring stock is safer and has limited risk than simply selling 'covered calls', its certainly not without some risk. the best way to see for yourself is to put it on a risk graph. if you are bullish on the stock you might consider buying the way out put option maybe in the money and see if you can sell the front month calls against it. then, you may have your 0 risk trade on. if you're stock moves higher, move your puts higher as well to lock in gains. tough to do but not impossible.

 

[tradermic]

You will collect a dividend on the stock, yes, if you're long it. But it's not gonna be a free lunch.

Sorry, but can you elaborate. I buy the put and sell the call for a set price. If the stock maintains its dividend payment then it would get paid to me. If the stock falls then I am protected by the put.

Why can't I collect dividends?

 

[Martinghoul]

You can, but it's all priced in... Think of it this way: all else being equal, dividends mean that the fwd price of the underlying is lower than spot. That, in turn, implies that, to get the same delta, you need to pay more for your puts and will receive less for your calls.