Legging Into Collars

If a trade setup looks real good, either via technicals or fundamentals, it is ok to leg into a collar options instead of placing the entire trade right away. This can be done by setting up a covered call then buying the put or wait a few days for the stock to make a move. Here's an example of a recent trade using SLB.

This stock was originally bought around $41. Based on the chart, it looked like there was some resisentance around the $45 level, so the March $45 call strike was sold for around $0.34. This limits the profit to $434 (100x(45-41+0.34)), assuming no adjustments are made.

To turn this into a collar, all that would need to done is to buy a put option. One possibility is to buy the March $42.5 put for about $1.05. The downside risk is now capped. Should the stock fall apart, the loss would actually be a profit of $79 (100x(42.5-41+0.34-1.05)). Now if the stock continues to rally, the profit drops to $329.

The overall return would be about +1.9% on the downside or about +7.9% on the upside for a position held for only a month.