Resetting your collars - in a bruising market

by Wayne Ferbert on July 23rd, 2012

I wish I had a fix for you – but I don’t. When your OTM calls expire in your collars and it is time to re-sell your calls, you wish for an up day in the markets. After expiration this weekend, we were not graced with an up market today.

The good news is that unless you got really greedy at June expiration, you easily had your broad index calls expire out of the money. These would be the IWM, SPY, & MDY positions. And most of them were up modestly by 1-3% for the quarter. We like slow and steady moves up where we can keep selling the calls and see them expire worthless!

However, today takes some of the steam out of those gains – and makes re-setting the calls a little more difficult. To be honest, the mid-day market turn has me hoping for a chance to sell the calls at more attractive levels later today or tomorrow. But we can’t be too slow in getting our fills. We want to make sure we don’t lose too many days of time value – but we also don’t want too low a level and have a higher risk of seeing that level get breached.

This is just the dynamic of resetting your collars in this kind of market. It is not always pretty.

BUT THE MATH HAS NOT CHANGED!! The process is simple.

For your broad indexes, look at the cost to hedge at 6 months from now (January 2013 expiration). Now, divide that by 6 (the number of months until January ’13 expiration). This is the premium in calls you would need to collect every month to pay for that protection. Look for the call that matches that amount. Now, move off that strike based on the following: Adjust for the dividends you expect to collect in that ETF index over the next 6 months. Then, adjust downward between 1-2% more in cost of the underlying – divided by 12. This is the premium for the call you should be targeting. It isn’t always pretty – but the discipline is what keeps you hedged – while collared!


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