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  • Calculating Collar Trades Using the BCI Trade Management Calculator (TMC) – May 5, 2025

    May 05, 2025 Uncategorized 0 comment

    The Collar Strategy is a covered call writing-like strategy where a protective put is added to the trade, thereby establishing a floor and a ceiling with a maximum gain and a maximum loss. The 3 legs of a collar are an out-of-the-money (OTM) call, an OTM put and a long stock position. This article will use a real-life example with NVDIA Corp. (Nasdaq: NVDA) to demonstrate how to calculate the initial collar returns using the BCI TMC spreadsheet.

    Main uses for adding a protective put to convert covered call trades to collar trades

    • Protection in a contract period to protect during an earnings report
    • Protection during bear & volatile market conditions
    • Reducing risk during uncertain times (Brexit, Fed announcement, elections etc.)
    • Protecting appreciated stocks
    • Insurance when we can’t be near a computer to monitor portfolios

    Real-life example with NVDA

    • 11/17/2024: Buy 100 x NVDA at $132.67
    • 11/17/2024: STO 1 x OTM 12/17/2024 $134.00 call at $5.30 (ceiling)
    • 11/17/2024: BTO 1 OTM 12/17/2024 $128.00 put at $3.45 (floor)

    NVDA option-chain on 11/27/2024 for the 12/27/2024 expiration

    NVDA call returns only: Before protective put purchase

    • The entire call premium is entered
    • If taken through expiration, this is a 31-day trade (red circle)
    • The breakeven price is $127.37 (yellow cell)
    • The initial covered call return is 3.99%, 47.04% annualized (brown cells)
    • An additional 1% can be realized if the share value moves up to or beyond the $134.00 strike (purple cell)

    NVDA Collar Calculations Deducting the Put Debit from the Call Credit ($5.30 – $3.45)

    • The net option premium is entered ($5.30 – $3.45 = $1.85)
    • If taken through expiration, this is a 31-day trade (red circle)
    • The initial covered call return is 1.3%, 16.42% annualized (brown cells)
    • An additional 1% can be realized if share value moves up to or beyond the $134.00 strike (purple cell)

    NVDA Collar Pros & Cons

    • Advantages

    –Protects against catastrophic share loss below the $128.00 protective put strike

    –Still results in a net option credit with an insurance policy

    –Upside potential remains the same (1%)

    –Sleep better at night?

    • Disadvantages

    –Initial time-value return is reduced from 3.99%, 47.04% annualized to 1.39%, 16.42% annualized

    Discussion

    • The collar strategy adds a protective put to our covered call trades
    • Protects us against overwhelming share price decline
    • Time-value returns will be lower in exchange for the added protection
    • Our collar trades can be managed by the BCI Trade Management Calculator (TMC)
    • We do so, by deducting the put premium debit from the call premium credit
    • We can establish both initial and final calculations using this spreadsheet

    Author: Alan Ellman

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