M70-301 MB6-869 1Z0-144 1Z0-599 400-051 70-458 810-420 C_TBW45_70 C2090-540 C2180-276 C4090-452 EX0-001 HP2-E59 PEGACSSA_v6.2 1Z0-061 220-801 640-911 70-680 C_TSCM52_66 ICBB 070-331 312-50v8 820-421 C_TAW12_731 JN0-102 70-483 70-488 700-505 70-347 070-347 070-411 70-486 MB2-701 070-346 100-101 70-346 70-463 700-501 70-412 C4090-958 EX200 070-463 70-331 70-457 HP0-J73 070-412 C_TFIN52_66 070-489 070-687 1Z0-062 350-029 070-247 070-467 1Z0-485 640-864 70-465 70-687 74-325 74-343 98-372 C2180-278 C4040-221 C4040-225 70-243 70-480 C_TAW12_731 C_HANATEC131 C2090-303 070-243 070-417 1Z0-060 70-460 70-487 M70-301 MB6-869 1Z0-144 1Z0-599 400-051 70-458 810-420 C_TBW45_70 C2090-540 C2180-276 C4090-452 EX0-001 HP2-E59 PEGACSSA_v6.2 1Z0-061 220-801 640-911 70-680 C_TSCM52_66 MB2-701 070-346 100-101 70-346 70-463 700-501 70-412 C4090-958 EX200 070-463 70-331 70-457 HP0-J73 070-412 74-335 C_HANATEC131 C2090-303 070-243 070-417 1Z0-060 70-460 70-487 M70-301 MB6-869 1Z0-144 1Z0-599 400-051 70-458 810-420 C_TBW45_70 C2090-540 C2180-276 C4090-452 EX0-001

March 19, 2015

Consider a Collar for Profitable Investments

A collar strategy is an option strategy that can particularly benefit investors. In this blog we have a lot more options education for traders and less for long-term investors so here is a strategy both can consider. A collar is simply holding shares of stock and buying a put and selling a call. Usually both the call and the put are out-of-the money (OTM) when establishing this option combination. A basic single collar represents one long put and one short call along with 100 shares of the underlying stock. A collar strategy is frequently implemented after stock (investment) has increased in price. The main objective of a collar is to protect profits that have accrued from the shares of stock rather than increasing returns. Is that an option strategy you might consider? Let’s take a look.

Why a Collar?

Since the market has been on a rather a bullish run and there are a plethora of stocks that have increased in value and it might be a good time to talk about some strategies that can help protect those gains. One option strategy is to buy a put. The investor has some protection for the unrealized profits in case the stock declines. The other part of the combination is selling the OTM call. By doing this, the investor is prepared to sell his or her shares of stock if the call is exercised because the stock has moved above the call’s strike price.


The advantage of a collar strategy over just buying a protective put is being able to pay for some or the entire put by selling the call. In essence, an investor buys downside stock protection for free or almost free of charge. Until the investor exercises the put, sells the stock or has the call assigned, he or she will retain the stock.

Volatility and Time Decay

Even though implied volatility (IV) has been really low over the last several months in the market, volatility and also time decay are not usually big issues when it comes to a collar strategy. The simple explanation is because the investor is long one option and short another so the effects of volatility and time decay will generally offset each other.

An example:

An investor could have bought 100 shares of Delta Air Lines (DAL) in October of last year for about $32 a share. At the time of this writing the stock has climbed to about $46 a share and the investor is worried about the current market conditions being extended to the upside and protecting his unrealized gains. The investor can utilize a collar strategy.

The investor can buy a April 43 put for 0.90. If the stock falls, the investor will have the right to sell the shares for $43. At the same time the investor can sell a April 48 call for 1.00. This will make the trade a net credit of 0.10 (1 – .90). If the stock continues to rise, it can do so for another $2 until the stock will most likely be called away from him.

Three Possible Outcomes

The stock finishes over $48 at April expiration. If this scenario happens, another $2 per share is realized on the stock and $10 on the net credit of the combination is the investors to keep.

The stock finishes between $43 and $48 at April expiration. In this case, both options expire worthless. The stock is retained and the $10 net credit is the investors to keep.

The stock finishes below $43 at April expiration. The investor can sell the put option if he wishes to retain the stock or exercise the right to sell the stock at $43. Either way the $10 net credit is the investors to keep.


The nice thing about a collar strategy is that an investor knows the potential losses and gains right from the start. If the stock climbs higher, the profits may be curbed due to the short call but if the stock takes a dive, the investor has protection due to the long put and protection might not be such a bad idea if the market corrects itself. Even an investor can benefit from some options education!

John Kmiecik

Senior Options Instructor

Market Taker Mentoring

August 7, 2014

An Option Strangle with AAPL Options

An option strangle is an option strategy that option traders can use when they think there is an imminent move in the underlying but the direction is uncertain. With an option strangle, the trader is betting on both sides of a trade by purchasing a put and a call generally just out-of-the-money (OTM), but with the same expiration. By buying a put and a call that are OTM, an option trader pays a lower initial price than with an option straddle where the call and put purchased share the same strike price. However, this comes with a price so-to-speak; the stock will have to make a much larger move than if the option straddle were implemented because the breakeven points of the trade will be further out due to buying both options OTM. The trader is, arguably, taking a larger risk (because a bigger move is needed than with an option straddle), but is paying a lower price. Like many trade strategies there are pros and cons to each. If this or any other option strategy sounds a little overwhelming to you, I would invite you to checkout the Options Education section on our website.

The Particulars

An option strangle has two breakeven points just like the option straddle. To calculate these points simply add the net premium (call premium + put premium) to the strike price of the call (for upside breakeven) and subtract the net premium from the put’s strike (to calculate downside breakeven). If at expiration, the stock has advanced or dropped past one of these breakeven points, the profit potential of the strategy is unlimited (for upside moves). The position will take a 100% loss if the stock is trading between the put and call strikes upon expiration. Remember that the maximum loss a trader can take on an option strangle is the net premium paid.

Implied Volatility

The implied volatility (IV) of the options plays a key role in an option strangle as well. With no short options in this spread, the IV exposure is concentrated. When IV is considered low compared to historical volatility (HV), it is a relatively “cheap” time to buy options. Since the option strangle involves buying a call and put, buying “cheaper” options is critical. If the IV is expected to increase after the option strangle is initiated, this could increase the option premiums with all other factors held constant which is certainly a bonus for long option strangle holders.

Example Trade

To create an option strangle, a trader will purchase one out-of-the-money (OTM) call and one OTM put. An option trader may think Apple Inc. (AAPL) looks good for a potential option strangle. At the time of this writing, Apple stock is trading at around $98. With IV lower than HV and the trader unsure in what direction the Apple stock may move, the option strangle could be the way to go. The trader would buy both an Aug-29 99 call and an Aug-29 97 put. For simplicity, we will assign a price of 1.65 for both – resulting in an initial investment of 3.30 (1.65 + 1.65) for our trader (which again is the maximum potential loss).

Apple Stock Rallies

Should the Apple stock rally past the call’s breakeven point which is $102.30 (99 + 3.30) at expiration, the 97 put expires worthless and the $99 call expires in-the-money (ITM) resulting in the strangle trader collecting on the position. If, for example at expiration the stock is trading at $104 which means the intrinsic value of the call $5 (104 – 99), the profit is $1.70 (5 – 3.30) which represents the intrinsic value less the premium paid.

Apple Stock Declines

The same holds true if the stock falls below the put’s breakeven point at expiration. The put is in ITM and the call expires worthless. At expiration, if Apple stock is trading below the put’s breakeven point of the trade which is $93.70 (97 – 3.30), a profit will be realized. The danger is that Apple stock finishes between $97 and $99 as expiration occurs. In this case, both legs of the position expire worthless and the initial 3.30, or $330 of actual cash, is lost.

Maximum Loss

Notice that the maximum loss is the initial premium paid, setting a nice limit to potential losses. Profits and losses can be realized way before expiration and it is up to the trader to decide how and when to close the position. Potential profits on the strangle are unlimited which can be very rewarding but as always, a traders needs to decide how he or she will manage the position.

John Kmiecik

Senior Options Instructor

Market Taker Mentoring

July 31, 2014

A Credit Spread can be Similar to Insurance

Selling a credit spread involves selling an option while purchasing a higher or lower strike option (depending on bullish or bearish) with the same expiration and with the short option being more expensive than the long option. For example, selling a put credit spread involves selling a put and buying a lower strike put with the same expiration. Maximum profit would occur if the underlying is trading at or above the sold put strike at expiration; the spread would expire worthless. Selling a call spread involves selling a call and buying a higher strike call with the same expiration. Maximum profit would be realized if the stock is trading at or below the sold call strike at expiration; the spread would expire worthless.

The long options are there to protect the position from the potential losses associated with selling options. With a spread, the most the position can lose is the difference between the strikes minus the initial credit received. This would occur if the stock is trading above at or above the long call or at or below the long put. Using a call credit spread as an example, if a trader sold a 50 call and bought a 55 call, creating a credit of $1, the most the trader can lose is $4 (5 – 1) if the underlying closed at or above $55.

The Objective

The objective of a credit spread is to profit from the short options’ time decay while protecting gains with further out-of-the-money (OTM) long options. The goal is to buy back the spread for less than what it was sold for or not at all (meaning it expires worthless). Just like selling short stock, a trader wants to sell something that is expensive and buy it back for cheaper. The same holds true for credit spreads.

An Example

Here is a credit spread trade idea we recently looked at in . When Amazon Inc. (AMZN) was trading around $348 towards the middle of July, a July 335/340 put spread could have been sold for 0.55. This means the July 340 put strike was sold and the July 335 put strike was purchased for a credit of 0.55. The maximum profit in the spread was the credit received (0.55) and would be realized if AMZN was trading at or above $340 at July expiration. Remember that a profit would be realized if the spread could be bought back (closed out) for less than the credit of 0.55. The most that can be lost on the spread is 4.45 (5 – 0.55) and that would be realized if the stock was to close at or below $335 at July expiration.

What’s the Point?

The risk/reward ratio of this credit spread begs the question why would anyone want to risk maybe eight times or more on what they stand to make in the example above? The simple answer is probability. Given the ability to repeat the trade over and over again with different outcomes, the trader will make $55 many, many more times than he or she will take the $445 loss. This was a hypothetical situation, but let’s say that the strategies winning percentage was close to 85% like in the example above. The trader needs to look at prior historical price action of the stock to determine probability of success.


How does this seem similar to insurance you ask? The credit spread strategy is similar to the insurance business because insurance companies get to keep premiums if people don’t get sick or if people don’t have accidents, etc. Traders turn themselves into something like an insurance company when they implement credit spreads and keep premium as long as something doesn’t go drastically wrong.

Just like an insurance company has to decide if the risk is worth the potential reward, option traders that trade vertical credit spreads have to analyze how much can they collect, how much can they lose and the probability of having a profitable trade. In a future blog, we’ll discuss how a trader can use options implied volatility to help put probability on his or her side.

John Kmiecik

Senior Options Instructor

Market Taker Mentoring


July 10, 2014

Option Delta and Option Gamma

The option “greeks” help explain how and why option prices move. Option delta and option gamma are especially important because they can determine how movements in the stock can affect an option’s price. Let’s take a brief look at how they can affect each other.

Delta and Gamma

Option delta measures how much the theoretical value of an option will change if the stock moves up or down by $1. For example, if a call option is priced at 3.50 and has an option delta of 0.60 and the stock moves higher by $1, the call option should increase in price to 4.10 (3.50 + 0.60). Long calls have positive deltas meaning that if the stock gains value so does the option value all constants being equal. Long puts have negative deltas meaning that if the stock gains value the options value will decrease all constants being equal.

Option gamma is the rate of change of an option’s delta relative to a change in the stock. In other words, option gamma can determine the degree of delta move. For example, if a call option has an option delta of 0.40 and an option gamma of 0.10 and the stock moves higher by $1, the new delta would be 0.50 (0.40 + 0.10).

Think of it this way. If your option position has a large option gamma, its delta can approach 1.00 quicker than with a smaller gamma. This means it will take a shorter amount of time for the position to move in line with the stock. Stock has a delta of 1.00. Of course there are drawbacks to this as well. Large option gammas can cause the position to lose value quickly as expiration nears because the option delta can approach zero rapidly which in turn can lower the option premium. Generally options with greater deltas are more expensive compared to options with lower deltas.


Option gamma is usually highest for near-term and at-the-money (ATM) strike prices and it usually declines if the strike price moves more in-the-money (ITM) or out-of-the-money (OTM). As the stock moves up or down, option gamma drops in value because option delta may be either approaching 1.00 or zero. Because option gamma is based on how option delta moves, it decreases as option delta approaches its limits of either 1.00 or zero.

An Example

Here is a theoretical example. Assume an option trader owns a 30 strike call when the stock is at $30 and the option has one day left until expiration. In this case the option delta should be close to if not at 0.50. If the stock rises the option will be ITM and if it falls it will be OTM. It really has a 50/50 chance of being ITM or OTM with one day left until expiration.

If the stock moves up to $31 with one day left until expiration and is now ITM, then the option delta might be closer to 0.95 because the option has a very good chance of expiring ITM with only one day left until expiration. This would have made the option gamma for the 30 strike call 0.45.

Option delta not only moves as the stock moves but also for different expirations. Instead of only one day left until expiration let’s pretend there are now 30 days until expiration. This will change the option gamma because there is more uncertainty with more time until expiration on whether the option will expire ITM versus the expiration with only one day left. If the stock rose to $31 with 30 days left until expiration, the option delta might rise to 0.60 meaning the option gamma was 0.10. As discussed before in this blog, sometimes market makers will look at the option delta as the odds of the option expiring in the money. In this case, the option with 30 days left until expiration has a little less of a chance of expiring ITM versus the option with only one day left until expiration because of more time and uncertainty; thus a lower option delta.

Closing Thoughts

Option delta and option gamma are critical for option traders to understand particularly how they can affect each other and the position. A couple of the key components to analyze are if the strike prices are ATM, ITM or OTM and how much time there is left until expiration. An option trader can think of option delta as the rate of speed for the position and option gamma as how quickly it gets there.

John Kmiecik

Senior Options Instructor

Market Taker Mentoring