Low Volatility Collar,

 

 

 

XYZ currently trading for $452.73

Typical Margin Account at 50 percent of $452.73 X 100 Shares *50 = $22,636.50

 

Trade Structure

 

We are going to Do a "Call instead of stock" Replacement for the underlying.

looking at about the .80 Delta Range

We find a option that will improve, and move closer and closer, penny for penny,- as the stock rises.

Delta .80  .85  .95 .100 ----------------------> (Moving like stock)

And will also start to lose as a slower directional rate if there is a faster decline. 

Delta   <----------------------.70  .75  .80  (Moving slower then typical stock underlying)

Slightly slowing down as it moves down,- till parity on time ultimately catches up.

The Cost and Distance away of this selected Call becomes Cheaper and Closer to the money in lower Volatility environments.

Right now we are looking at XYZ in the money call at a .94 delta is 400 Strike CALL

Currently trading at 55.70 or $5570.00 Compared to the margined stock at $22,636.50

But we will further reduce this $5570.00 as this is still way too high.

Its under these conditions that we will begin to alter the standard butterfly collar hedge.

Under the conventional thinking,- it suggests buying an ATM BUTTERFLY OR BWB to hedge the Stocks movement.

 

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Low Vol Environments are not expansive to good Fly pricing, it means they are more narrow and give the buyer less protection,

but the butterfly is designed, and can be broken down into two separate individual verticals,

a Debit vertical and a Credit vertical with a single middle overlapping shared strike.

Typical butterflies use both verticals together (debit - credit) to reduce cost on the one you have to buy, we are going to leave this thinking behind for one moment and only deal with the bot spread that actually gives us protection.

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The Correct work around,  is dependent upon a understanding of the interchangeability of Put Debit Spreads, To call Credit spreads as individual components on their own, and vise versa.

Here is why we are going to use a in the money CALL Credit Spread, and not the Butterfly.

back to our XYZ Example

We are going to want to buy the 455 (currently ATM )  $13.63

We are going to sell the 425 at $33.46

NET NET FOR THE VERTICAL $19.83 Credit

This Credit, then further reduces our DEEP in the money CALL Cost.

So now we are in the collar like position, with protection from 455-425 and it performs like stock above that for a NET debit of $3592

Now we are going to further sell a call to reduce costs yet again.

we elected to sell the 475 Call bringing in another 6.09 in Credit.

and that is the typical Collar in a Low Vol. our costs is  $2983.00

 

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Further reduced by SELLING A OTM CALL  SPREAD.

 

SOLD 480 @ 4.85

 

Bot 500 @ 1.91

 

NET NET Credit 2.94

 

  

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Total Cost is now $2689

 

 

Thank you in advance,