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Managing The Protected Capped Covered Call Collar Trade: Part 19 of Options Trading for All Types of Market Environments

Friday, June 7th, 2013

Back at the start of May we advised our clients to protect their positions in the Yield trade, through a Protected Capped Covered Call Collar strategy which is an options trading strategy that can be used to protect an existing position that has recently surged into a key resistance level. If you are of the opinion that the stock market is due for a pullback and the share has little chance of breaking the key resistance level, or if you want to potentially sell at a higher price than the market offer, you could use a Protected Capped Covered Call Collar strategy.

Protected Capped Covered Call Collar – is ideal for participating in future gains, while being protected on the downside. Rather than simply taking profits on the share position, paying capital gains tax and potentially missing out on future dividends and future upside, the trader enters into a Protected Capped Cover Call Collar. This strategy seeks to protect your existing share position, while still participating in some of the upside, for a modest outlay.

It has been said by some analysts that the yield trade is dead, but this is only true until the prospective yield(s) get too enticing for the income investor to resist. The high-yield stocks have suffered heavily in the recent sell-off, triggered by the plunge in the Aussie dollar, after the RBA surprised with its May interest rate cut. These high-yield stocks are entering into a period of consolidation, but many analysts see a further sell-off in the near-term. With this in mind we thought it timely to revisit a collar strategy which our clients entered into back in May.

Today we’ll discuss how you would manage this trade, now that the high-yield stocks have had such a big sell-off. Investors have a number of alternatives when they are faced with taking profits, either by closing the collar and risk being exposed to more downside risk if the high-yield stocks sell-off further, or you could roll the position and lock in some profits.

The Initial Commonwealth Bank Trade, Early May

The trade we recommended back in May this year offered share protection over CommBank (CBA) shares. In this strategy we recommended protecting CBA shares that had run up from $59.00 in November last year, up to as high as $73.80, where we expected it to find resistance near-term. The trade was entered into to allow clients to hold CommBank shares for the dividend (CBA goes ex-div around $2.00 on 15 Aug’13) while still having downside protection, by utilising the Protected Capped Cover Call Collar.

It was difficult to define a profit target on this stock because it is trading at all-time highs, but based on technical analysis you can see from the chart below that the stock has been in a steadily rising channel since last May and that $75.00 could be a key resistance level.

At the start of May, when CommBank was trading around $73.00, we priced protection at $72.00 by buying 7200 JUL13 Put for $1.65 and then selling the 7500 JUL13 Calls for $1.55. This trade cost 10 cents/share but we would be protected until the end of July expiry down to $71.90 and profits will be capped at $74.90. So the investor has 3% upside, while forgoing just over -1% downside**.

20130606_Managing_Protected_Collar_Aeye_11
Chart 1: Commonwealth Bank of Australia (CBA) – Protected Capped Covered Call Collar Trade

**Note: Transaction costs are not included.

P&L Diagram at Expiry
070613_CBA-PL
Chart 2: Commonwealth Bank of Australia – Protected Capped Covered Call Collar Trade P&L Diagram at Expiry

For maximum profit we wanted CommBank to pull back below the put strike price in the near-term so the protected position could be closed, and then for the stock to rebound for the dividend season.

Managing The Trade

The old adage to “sell in May and go away” has proven a successful strategy once again this year, although it took until mid-May for it to transpire.

At the start of June CBA is trading around $66.25, so you have a number of alternatives.

Alternative 1 – Close off the Protected Capped Covered Call Collar
You could close the collar position for a credit of $5.70, see below. This would have compensated you for the $6.70 fall in the CBA share price and you still stand to pick up the next CBA dividend in August. However you are exposed to any further sell-off in CBA shares.

CBA Options Trade
Table 1: Closure of the Protected Capped Covered Call Collar position giving a credit of $5.70

20130606_Managing_Protected_Collar_Aeye_12
Chart 3: Closure of the Protected Capped Covered Call Collar – CBA Position is at Risk of Further Falls

Alternative 2 – Take Profits and Roll the Protective Put
You could close the SHORT 7500 JUL CALL for 10c debit and take some of the profits from the 7200 JUL PUT. If you rolled the 7200 JUL PUT down to the 6800 JUL PUT you could pocket $3.00 per share (or around half of the $6.70 fall in CBA shares price) and still have protection below $68.00.

070613_CBA-Profits-Table
Table 2: Take profits & roll the protective Put giving protection from a further CBA sell-off

20130606_Managing_Protected_Collar_Aeye_21
Chart 3: Take Profits & Roll the Protective Put giving protection from a further CBA sell-off

Through this action you risk losing the value of the $68.00 PUT if CBA trades above this strike, however you do have more options if the CBA share price continues to weaken, including taking profits when you believe CBA has reached a bottom, or entering into a PUT spread to take some profits off the table.

Payoff Diagram at July’13 Expiry
20130606_Managing_Protected_Collar_Aeye_22
Chart 4: CommBank Payoff diagram for the CBA JUL 6800 PUT (cost $2.70)

Only time will tell where the share price will end up at expiry. However the position is protected until July expiry below $65.30 (=STRIKE-PREMIUM PAID).

For maximum profit we want CommBank to pull back below the put strike price in the near-term, so the protected position can be closed and then for the stock to rebound for the dividend season.

The Trade

Options can be used to reduce your risk while still participating in potential profits from moves in the underlying stock. The Protected Capped Covered Call Collar strategy provides the investor flexibility, allowing them to either take profits now or alternatively take part profits now and roll the PUT protection, protecting the share position against any further precipitous fall in CBA while still potentially picking up the dividend.

Utilise the features in the d2mxIRESS software to trade plan your options trades for the particular options strategy using your specific trade selection criteria. You will save time and potentially reduce your trading risk.

For more trade ideas and recommendations on how to trade in this market, sign up for a free trial of the D2MX Daily Trading Report, which provides a daily serving of insightful market analysis and trade recommendations from the D2MX Advisory team, including:

• Trade ideas and strategies
• Dividend enhancement strategies
• Market scans to watch
• International market analysis, and
• Highlights from the S&P/ASX 200
To request an obligation-free trial, call 1300 610 024, email advisory@d2mx.com.au or register online at www.d2mx.com.au.

Michael Hevern
Investment Adviser – D2MX Advisory

Alternate Profit Taking Strategy: Part 15 of Options Trading for All Types of Market Environments

Friday, May 3rd, 2013

Options afford traders the opportunity to achieve their objectives and/or trades in the market in ways that might not otherwise be available able to them, while limiting risks, particularly in volatile markets. Using options can also be a way to buy you time while you consider what you want to do with your stock position, as there may be dividend and capital gains tax considerations.

Today we’ll discuss a situation in which an investor wants to take profits at a price above the current market price. Investors have a number of alternatives when they are faced with taking profits, either by selling at market price and foregoing any upside, or alternatively they can try to capture a higher price while protecting their current position. Today we will illustrate the Protected Capped Covered Call Collar strategy. This protects your existing position while allowing you to participate in future upside movement in the stock.

The Protected Capped Covered Call Collar strategy is an options trading strategy traders can use to protect an existing position that has recently surged into a key resistance level. Rather than simply taking profits on the share position, paying capital gains tax and potentially missing out on future dividends and future upside, the trader enters into a Protected Capped Cover Call Collar. This strategy seeks to protect your existing share position while still participating in some of the upside, for a modest outlay.

If you are of the opinion that the stock market is due for a pullback and the share has little chance of breaking the key resistance level, or if you want to potentially sell at a higher price than the market offer, you could use a Protected Capped Covered Call Collar strategy. This strategy is similar to the protective put options strategy in that you also buy put options as protection. The difference is that you will now finance the purchase of those put options with the proceeds from writing an equal number of out of the money (OTM) call options.

The position will still protect you from losses below the strike price of the put options at minimal cost to yourself, but it will also stop the position from profiting beyond the strike price of the short call options should the stock stage another rally, and you could miss out on the dividend if this rally happens before the ex-dividend date. That is, you would miss out on a strong rally in exchange, but you get the protection of the put options for a minimal cost. Use the Protected Capped Covered Call Collar strategy when you expect the share price to move modestly higher or pull back significantly from current levels.

Protected Capped Covered Call Collar – is ideal for participating in future gains, while being protected on the downside.

Share Protection Case Study – Commonwealth Bank of Australia

Here at D2MX Advisory we recommended buying CommBank (CBA) for the dividend yield back in November last year, when CommBank was trading at $59.00. This trade was intended to capture the dividend(s), but the share price has subsequently jumped to as high as $73.60, where it looks like it may find near-term resistance. Recently we’ve had queries from clients wanting to know how they can take profits and or protect their position ahead of the next dividend which is not until next August.

So this week we discuss how you can potentially hold on to your CommBank shares, for the dividend, (CBA goes ex-div around $2.00 on 15 Aug 2013), while still having downside protection, by utilising the Protected Capped Cover Call Collar.

Given the recent surge in the banks and the old adage to “sell in May and go away”, we considered a Protected Capped Covered Call Collar was appropriate for protection for this position. It is difficult to define a profit target on this stock because it is trading at all-time highs, but based on technical analysis you can see from the chart below that Commbank has been in a steadily rising channel since last May and that the $75.00 resistance could be a key resistance level.

So at the start of the week, when CommBank was trading around $73.00, we priced protection at $72.00 by buying 7200 JUL13 Put for $1.65 and then selling the 7500 JUL13 Calls for $1.55. This trade cost 10 cents/share but we would be protected until the end of July expiry down to $71.90 and profits will be capped at $74.90. So the investor has 3% upside, while forgoing just over -1% downside**.

CBA Price Chart
Chart 1: Commonwealth Bank (CBA) Protected Capped Covered Call Collar Trade

P&L Diagram at Expiry

CBA Chart - Investment Payoff
Chart 2: Commonwealth Bank Protected Capped Covered Call Collar Trade P&L Diagram at Expiry

Trade Note

If CommBank (CBA) is still trading between the $72.00 and $75.00 option strike levels at expiry it will have cost 10 cents/share for the insurance of the share parcel. Ideally if CBA pulls back like it did this time last year, the position could be closed and the shares could be held for the run up into the dividend season.

For maximum profit we wanted CBA to pull back below the put strike price in the near-term, so the protected position can be closed and then for the stock to rebound for the dividend season.
Only time will tell where the share price will end up at expiry. However the position is protected until July expiry down to $71.90, but profits will be capped at $74.90**.

**Note: Transaction costs are not included.

The Trade

Options can be used to reduce your risk while still participating in potential profits from moves in the underlying stock. The Protected Capped Covered Call Collar strategy, gives the investor flexibility, allowing them to participate is some of the future gains up to the sold strike price and potentially the dividend, while being protected by the put position.

Utilise the features in the d2mxIRESS software to trade plan your options trades for a particular options strategy using your specific trade selection criteria. You will save time and potentially reduce your trading risk.

For more trade ideas and recommendations on how to trade in this market, sign up for a free trial of the D2MX Daily Trading Report, which provides a daily serving of insightful market analysis and trade recommendations from the D2MX Advisory team, including:

• Trade ideas and strategies
• Dividend enhancement strategies
• Market scans to watch
• International market analysis, and
• Highlights from the S&P/ASX 200

To request an obligation-free trial, call 1300 610 024, email advisory@d2mx.com.au or register online at www.d2mx.com.au.

Michael Hevern
Investment Adviser – D2MX Advisory

Options Trading for All Types of Market Environments

Catch up with other articles in this series:

Tags: call options, CBA, covered call, options strategies, options trading
Posted in Trading Strategies | No Comments

Dividend Capture Covered Call Collar: Part 10 of Options Trading for All Types of Market Conditions

Friday, June 22nd, 2012

The Dividend Capture Covered Call Collar is an options trading strategy traders can use to protect an existing position that has recently surged into a key resistance level and is about to pay a dividend. Rather than simply taking profits on the share position, paying capital gains tax and potentially missing out on the dividend and future upside, the trader enters into a Dividend Capture Covered Call Collar. This strategy seeks to protect your existing share position, while still participating in some of the upside, including the dividend, for a modest outlay.

The Dividend Capture Covered Call Collar allows you to participate in some of the future gains up to the sold strike price and hopefully the dividend, while being protected by the put position.

Dividend Capture Covered Call Collar – is ideal for participating in future gains and picking up the dividend, while being protected on the downside.

If you are of the opinion that the stock market is likely to sell-off and the share has little chance of breaking the key resistance level, but you still want to hold on to it for the dividend, you could use a Dividend Capture Covered Call Collar options strategy. The Dividend Capture Covered Call Collar strategy is similar to the protective put options strategy in that you also buy put options as protection. The difference is that you will now finance the purchase of those put options with the proceeds from writing an equal number of out of the money call options.

The position will still protect you from losses below the strike price of the put options at minimal cost to yourself, but it will stop the position from profiting beyond the strike price of the short call options should the stock stage a rally, and you could miss out on the dividend if this rally happens before the ex-dividend date. That is, you would miss out on a strong rally in exchange for putting on the protection of the put options for free (apart from commissions of course). Use a Dividend Capture Covered Call Collar when you expect the share price to move modestly higher or pull back significantly from current levels and you want to hang on for the dividend.

Income Trade – Telstra for Dividend

Here at D2MX Advisory we recommended buying Telstra for the dividend yield in January this year, when Telstra was trading at $3.30. This trade was intended to capture the dividend(s), but the share price has subsequently jumped to as high as $3.75, where it met resistance. Recently we’ve had queries from clients worried about the overall state of the markets, and who want to hold on to Telstra for the next dividend while protecting themselves on the downside.

So this week we discuss how you can hold on to your Telstra shares for the dividend, (TLS goes ex-div $0.14 on 22 Aug’12), by utilising the Dividend Capture Collar Strategy**.

Given the turmoil in the eurozone, which has been triggered by the worsening problems with the eurozone financial system and the debt crisis, we considered a Dividend Capture Covered Collar was appropriate for this position. Based on technical analysis you can see from the chart below that the $3.80 resistance level has held for over three years.

So when Telstra was trading around $3.66, we bought protection at $3.60 by buying 360 JUL12 Put for $0.05 and then sold the 380 JUL12 Calls for $0.03. This trade cost 2 cents but we are protected until the end of July expiry down to $3.65 and profits will be capped at $3.80.

Chart 1: Telstra Dividend Capture Covered Call Collar Trade

You can plan and analyse your trade as shown above, using the Derivatives functionality in the Market Analyser 7 software – refer to the Market Analyser 7 Derivatives Video Tutorial for a demonstration.

Trade Note

Telstra (TLS) is still trading between the $3.60 and $3.80 option strike levels, and only time will tell where the share price will end up at expiry. However we are protected until July expiry down to $3.55, but profits will be capped at $3.80**.

The Trade

Options can be used to reduce your risk while still participating in potential profits from a significant move by the underlying stock. The Dividend Capture Covered Call Collar strategy allows you to participate is some of the future gains up to the sold strike price and hopefully the dividend, while being protected by the put position.

Note: due to the low volatility in the Telstra stock, you could have simply just bought the puts, because you are paying approximately 1.5% of the stock value to protect your position down to $3.55 until the end of July, with the prospect of a 4% dividend (plus franking credits) due in August.

Utilise the features in the Market Analyser 7 software to trade plan your options trades for the particular options strategy using your specific trade selection criteria. You will save time and potentially reduce your trading risk.

Contact me at D2MX Trading on 1300 610 024 and I can help you trade, using a number of strategies that will give you the tools to navigate this market and help you boost your returns on investment. Banking stocks like Commonwealth Bank are ideal for this strategy.

I trust that this information has been helpful.

** Please note your may need to refer to a tax professionial regarding eligibility of franking credits.

Michael Hevern
Investment Adviser D2MX Trading

For Buy and Sell recommendations on ASX listed companies register for a free trial of MDS Financial Research.

MDS Financial Advisory Services offers general advice on trading options to generate consistent steady income on your investment portfolio. Call 1300 610 024 for further information.

Tags: covered call, Dividends, Ex Dividend, options trading, Telstra, trading for dividends, Trading Strategy
Posted in Trading Strategies | No Comments

The Covered Call Collar – Part 3 of Options Trading for All Types of Market Environments

Friday, August 12th, 2011

Part 3: The Covered Call Collar

The Covered Call Collar is an options trading strategy that traders can use to protect an existing position that has recently surged into a key resistance level. Rather than simply taking profits on the share position and potentially missing out on future upside, the trader enters into a Covered Call Collar. This options trading strategy seeks to protect your existing share position while still participating in some of the upside for a minimal or no outlay.

The Covered Call Collar allows you to participate in some of the future gains up to the sold strike price, while being protected by the put position.

Covered Call Collar: ideal for participating in future gains, while being protected on the downside.

If you are of the opinion that the stock is likely to sell-off with little chance of breaking the key resistance level, but you still want to hold on to it, you could use a Covered Call Collar options strategy. The Covered Call Collar strategy is similar to the protective put options strategy in that you also buy put options as protection. The difference is that you will now finance the purchase of those put options with the proceeds from writing an equal number of out of the money call options.

The position will still protect you from losses below the strike price of the put options at minimal to no cost to yourself, but it will also stop the position from profiting beyond the strike price of the short call options should the stock stage a rally. That is, you would miss out on a strong rally in exchange for putting on the protection of the put options for next to no cost (apart from commissions, of course).

Use a Covered Call Collar when you expect the share price to move modestly higher or pull back significantly from current levels.

Recent Trade: Newcrest Mining (NCM)

A recent trade which is yet to pay off was Newcrest Mining. We initially entered the share position when the stock price broke above its 50 and 200 day moving averages, around $38.50. It shot up soon after we entered the trade and has now been trading sideways for the past few weeks. We considered a covered collar was appropriate for this position. Based on technical analysis you can see from the chart that the $42.50 resistance level has held for over a year.

So we bought protection at $39.00 by buying 3900 SEP11 Put for $0.645 and then wrote the $42.50 SEP11 Calls for $0.775. We received a credit for this trade and the position remains open. We are protected until September expiry down to $39.00 and profits will be capped at $42.50.

Chart 1: Newcrest Mining Covered Call Collar Trade

You can plan and analyse your trade as shown above, using the Derivative Profiler option in the Market Analyser software.

MarketAnalyser also provides a payoff diagram for further trade analysis as follows:

Chart 2: The payoff diagram for the Newcrest Covered Call Collar trade.

Trade Note

Newcrest (NCM) is still trading between the $39.00 and $42.50 option strike levels and only time will tell whether the share price will end up at expiry, but we are protected until September expiry down to $39.00 and profits will be capped at $42.50.

The Trade

Options can be used in order to reduce your risk while still participating in potential profits from a modest move in the underlying stock. Here we’ve explained the Covered Call Collar strategy which allows you to participate in some of the future gains up to the sold strike price, while being protected by the put position.

In future articles we will talk about the High Yield Covered Call strategy and the Stock Repair strategy which is particularly relevant to this market.

Utilise the features in the Market Analyser software to plan your trades for the particular options strategy using your specific trade selection criteria. You will save time and potentially reduce your trading risk. Sign up for a free 14-day software trial here.

By Michael Hevern
Head of Research

For buy and sell recommendations on ASX listed companies register for a free trial of MDS Financial Research.

MDS Financial Advisory Services offers general advice on trading options to generate consistent steady income on your investment portfolio. Call 1300 610 024 for further information.

Tags: covered call, Financial Advisory, Market Analyser, Newcrest Mining, options, options trading, Trading Strategies
Posted in ASX Trading News, Trading Strategies | 1 Comment

The Covered Call – Part 2 of Options Trading for All Types of Market Environments

Friday, July 22nd, 2011

Part 2 – The Covered Call

The Covered Call, also known as a Covered Buy Write or Covered Call Write, is the options trading strategy that most beginners learn about. It is a strategy which seeks to make a monthly income by selling call options against existing stock holdings.

The Covered Call allows you to generate a regular monthly “rental” income on your current stock portfolio, even when the stock prices remain stagnant. The Covered Call can also be used to protect against a moderate short term drop in stock price, to a limited extent. These characteristics make the Covered Call an attractive options trading strategy for all traders who hold long term stock positions.

Use a Covered Call when you wish to hold on to a stock that is trading sideways to slightly higher, while making a monthly income from it. You can also use a Covered Call to protect your equity when the stock goes into a slight correction, but only to a specific price limit. A Covered Call consists simply of writing 1 contract of out of the money call options for every 100 shares of the underlying stock owned.

The Covered Call is ideal for generating a regular monthly “rental” income from your current stock position.

A recent trade that paid handsome dividends was Fosters, which we entered when there was takeover speculation, back in June.

We bought Fosters at $4.55 and wrote the $4.65 Jul11 Calls for $0.22 and closed the position on the 22^nd of June 2011 after the takeover bid was announced, for a tidy 7% profit.

Investors who took advantage of our High Yield Covered Call strategy actually made 30% on the same trade. This strategy will be discussed in a later article, or you can call me on 1300 610 024 to talk about it further.

Chart 1: Fosters Covered Call Trade (Took Profits on Takeover Announcement)

Covered Call Profile

You can plan and analyse your trade as shown above, using the Derivative Profiler option in the Market Analyser software.

Trade Note

We could have made a higher return on the trade if we just bought the stock (14% return), but by using the Covered Call strategy we reduced our risk as we were being paid $0.22 or 5% to wait for the bid to come along. At the time we entered the trade Fosters was saying that they had not been approached by any interested party.

The Trade

Options can be used in order to reduce your risk while participating in the profits from a significant move by the underlying stocks. Here we’ve explained the Covered Call strategy which is used to generate monthly “rental” income from your current stock position.

In future articles we will talk about the Covered Call Collar strategy, which is similar to the protective put options strategy in that you also buy put options as protection, and the Stock Repair strategy which is particularly relevant to this market.

Utilise the features in the Market Analyser software to trade plan your options trades for the particular options strategy using your specific trade selection criteria. You will save time and potentially reduce your trading risk.

By Michael Hevern
Head of Research

Special Report – Short Selling Ban Lifted

Monday, May 25th, 2009

The Australian Securities and Investments Commission (ASIC) today said it would lift the current ban on covered short selling of financial securities from market open today, 25 May 2009. ASIC will still monitor the market by continuing to require the daily reporting of gross short sales and the publication to the market of aggregate short sales the day after trading.

We have taken this opportunity to review the sectors and key stocks affected by this move. To view our full report, click here.

By Michael Hevern
Head of Research

Tags: ASIC, covered call, options strategy, Short Selling
Posted in Stock Market Analysis | No Comments

Short-selling ban lifted early

Monday, May 25th, 2009

The ban on the covered short-selling of financial stocks will be lifted today, five days before the scheduled expiry date.

ASIC imposed the ban eight months ago, in an effort to curb the market volatility prevalent in the wake of the Lehman Brothers collapse. But today the regulator has announced the conditions are favourable for a return to covered short sales.

The ban on covered short selling of most non-financial securities was lifted in November.

To read ASIC s statement, click here.

To find out more about using covered calls as part of your trading strategy, visit the Trader Dealer website.

Tags: ASIC, covered call, finance news, options trading, short sell, Trading Strategies
Posted in ASX Company News | No Comments

Online Stockmarket Trading Update

Posts Tagged ‘covered call’

Managing The Protected Capped Covered Call Collar Trade: Part 19 of Options Trading for All Types of Market Environments