TipSheet #4 - Using Collars to Insure against stock losses...
A month ago my neighbor brought home a shiny new BMW...His first one. Every Saturday he would proudly polish the new car to a high luster. Then one evening a frazzled soccer mom in a giant van backed into the BMW and by the time she maneuvered her vehicle to get out of the driveway, she left behind a one foot high wound the length of my neighbor's new car. Have you ever seen a grown man cry?
When you see a car wreck like that it gets you thinking about insurance, doesn't it?
The stock market over the last few months and definitely the last year sort of looks like a car wreck to me. That's why I'm thinking about insurance for my stock investments.
With interest rates so low, the stock market is the only place to invest for reasonable returns, and one way to get insurance on your stock investments is to use a collar. With collars, your maximum loss on a stock is limited. For example, you could buy BBB (Not a real stock) for $68 a share and be guaranteed to receive at least $60 for that stock any time during the next five months (downside protection). This transaction is paired with a covered call so you could make around $2.60 a share in cash today (that's 3.97% simple interest or 9.52% annualized) and you will make even more if the stock price goes up.
Collars are like car insurance except instead of paying for the protection, you get the cash back in your pocket.
That soccer mom drops the kids off at the corner now...
Step-By-Step Procedure - Finding Collar's To Limit Stock Losses
If you have not done so yet, go to http://www.poweropt.com/logon.asp.
Enter your User ID and password then click the [Log On] button.
When the MY HOME page appears, you may have to add the Collar strategy to the strategy navigation tabs. Use the "Other Strategies" navigation tab to add the "Collar" tab and "Save".
Once/If you have the Collar strategy tab shown, click it, then click the "Search" link under the "Collar Tools" section in the middle of the page.
Once the SmartSeachXL tool for collar searching loads, scroll down the page and click the drop down menu for "Search Settings Saved As:" and select "Limited Stock Loss". The system will automatically run a pre-set search for you. If you would like to make any adjustments to those parameters, simply click the field you wish to adjust and type in the numbers that apply to your investing ideas.
For more information on what the column headings mean, move your pointer over one of the underlined heading and in a few moments a definition will appear.
NOTE: If you wish to view Collar spreads for stocks you already own, simply click the "Create/Modify List" function at the bottom of the parameter field and create your own personal stock list. YOu can then select your list of personal stocks against those criteria to find protective Collar spread possibilities for stocks you may own.