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I have a conundrum.

I have a stock that has had considerable price appreciation over the past year. Well over 100%. I no longer see any factor (or fundamentals) supporting it's current price (in the short term). Having said that though the long term may well see further price appreciation, but I believe that to be 6-9 months+.

I have three options in trying to protect the capital / unrealized profit:

1) Sell the stock. Something I don't want to so because I like it for the long term and don't want to take a tax hit now. 2) Buy an near OTM put - thereby instituting a protective put strategy. 3) Create a Collar on the position.

This is my predicament. Do I use option (2) or (3)?

(2) Is quite feasible for a shorter dated option <45 days. It's not expensive to buy an OTM put and therefore won't erode capital/unrealized-profit. Buying a longer date put ~100 days is much more expensive and therefore will erode capital.

(3) I have priced and can create a zero cost collar for a longer dated option ~100 days but for this to work (zero cost) I will have very little upside before the stock would be called.

(3.1) Buy a longer dated put (6 months) and sell shorter dated calls (1 month) over time to recover the premium paid.

The stock is reasonably volatile so for option (3) it could potentially move in to be called in the short term.

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  • $\begingroup$ Why is the collar pricing not working for you ? If the stock is 100 then the costless collar should look like (75, 120) or something like that. $\endgroup$ – dm63 Jan 5 '17 at 9:56
  • $\begingroup$ No it's not, the vol is high, so the collar only works per your analogy 75, 110. I'm beginning to think that if I want to lock in the profit then apply the zero cost collar. Else if I'm bullish (which I'm not) Sell long dated Call, buy (roll) short dated Puts. Bearish (which I am) buy long dated Put sell (roll) short dated Calls. $\endgroup$ – 765tgs Jan 5 '17 at 11:58
  • $\begingroup$ Your profile doesn't say, but in the US, if you sell it in Jan 2017, you will not have to pay taxes until Apr 2018. $\endgroup$ – rajah9 Jan 6 '17 at 17:03
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I think your option 3, with a zero-cost collar, is a good way to go.

Here's another option. You could also consider a ratio. Say you own 200 shares with the stock at \$100. Sell 1 \$105 call, and use the proceeds to pay for 2 \$90 puts. You would benefit on the upside movement of the stock.

Or if you really don't think it'll go up much more and have the margin, sell 3 \$110 calls and pay for 2 \$90 puts. Here you would be hurt by an upside movement of the stock.

See http://www.investopedia.com/terms/r/ratio_call_write.asp for the Ratio Call Write.

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  • $\begingroup$ You quite right - didn't consider using a ratio for my transaction, the stock has an implied vol of 184% - crazy. Tx $\endgroup$ – 765tgs Jan 13 '17 at 8:10

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