The collar strategy is a covered-call-writing-like strategy where protective puts are added to our covered-call trades, explains Alan Ellman of The Blue Collar Investor.

This creates a ceiling (the short call) and a floor (the long put). Typically, the expiration dates of the calls and puts are the same. We must also ensure that the call credit and put debit result in a net credit scenario. On 8/26/2021, Saafi wrote to me with a proposed collar trade where a Weekly call option and a Monthly put option were used. This article will analyze this real-life trade with Direxion Daily S&P Biotech Bull 3X Shares (LABU). This is a leveraged ETF.

• 8/27/2021: Buy 100 x LABU at \$60.50
• 8/27/2021: STO 1 x 9/3/2021 \$63.60 call at \$1.85 (ceiling)
• 8/27/2021: BTO 1 x 9/17/2021 \$59.00 put at \$4.85 (floor)
• The trade incorporates a one-week call and a three-week put

We all (okay most) remember high-school algebra where we convert fractions to a common denominator. In this case, let’s simplify the trade analysis by breaking up the three-week put premium into three weekly premiums of \$1.62 (\$4.85/3).

Calculations Using the BCI Collar Calculator

LABU: Collar Calculations

• The red arrows show an initial one-week time-value return of 0f 0.38%, 19.82% annualized
• The green arrows show a maximum one-week return (with upside potential) of 5.34%, 278.38% annualized
• The blue arrows show a maximum one-week loss (to the put strike) of 2.10%, 109.46% annualized

Discussion

To appropriately analyze a collar trade with a longer-term protective put, we must convert the put premium to a similar time frame as the short call. These stats are then entered into the BCI Collar Calculator to ensure the return meet our initial time-value return goal range, which will differ from investor-to-investor.

Saafi’s trade incorporated a leveraged ETF, which creates a good-news-bad-news high volatility and high premium trade. Using a protective put will mitigate potential losses to the downside. Generally speaking, leveraged ETFs are not appropriate for most retail investors.