Trading Idea: Equity Collar on Bank of America (BAC)
Source: http://www.financepuzzle.comPosted on Thursday, August 21st, 2008 | In Market Commentary
As the US financial crisis continues without an end in sight, there are opportunities for protection if you are long holder of certain financial stocks. With so many equity option strategies available, it is up to each individual investor to utilize which strategy to employ. To illustrate my point, I will be entering into a Equity Collar strategy with Bank of America (BAC), benchmarking this strategy against a buy and hold strategy with the same BAC stock.
Equity collars are utilized by investors who are looking to minimize the downside risk of a trade, foregoing upside potential in return for downside protection. As defined by CBOE, an equity collar “consists of the simultaneous purchase of a put option, and the writing of a call option. Both options are out-of-the-money, and usually have the same expiration date.”
Looking at the 6-month chart of BAC with the current volitality, this equity is a perfect candidate to execute an equity collar strategy for my paper-trade portfolio:
Here are the trade details:
Buy 100 shares of BAC @ $29.04/share
Sell 100 shares of Nov 08 30 Call Option @ 2.95/share
Buy 100 shares of Nov 08 27.50 Put Option @ 3.12/share
Net Amount per share is $29.21/share, not including transaction costs.
As mentioned earlier, I will benchmark this paper-trade against a buy and hold stategy to evauluate the effectiveness of this trade. This trade stratey can be used for any equity, specifically any financial stock in this current environment.
To stay up to date with the latest details on this paper-trade, please consider subscribing to FinancePuzzle.
Author Disclosure: At the time of posting, I am neither long nor short LEH. This trade is a “paper” trade and is being used for educational purposes.
Last 5 posts by Elias Tsepouridis
- Dividend Growth Model shows 35% potential upside in GE - November 9th, 2008
- Words of Wisdom from Warren Buffett - October 6th, 2008
- Design Within Reach, a nice small cap for your portfolio - September 14th, 2008
- Rule of 19 - September 6th, 2008
- ING CD Rollover perk - August 25th, 2008
 About Elias Tsepouridis (http://www.financepuzzle.com)
Elias Tsepouridis has 10 years of corporate financial management and valuation experience. He is a freelance writer who has managed his own portfolio for the last 5 years. Elias publishes and tracks all of his investments on his blog FinancePuzzle.com. His detailed analysis focuses on purchasing stock of businesses with long-term value and growth potential at a price that includes a safety of margin. Elias analyzes one stock per week, which is recommended by his subscriber base. |
No recommendations, either expressed or implied, are being made to buy, sell, hold or short any of the mentioned stocks. No legal, tax or accounting advice is expressed or implied. Always contact your attorney, CPA, or tax advisor before acting on any legal or tax issues. StraightStocks.com is not responsible for the content, products, or services of any of the advertisers on this site. StraightStocks.com receives compensation from advertisers on this blog. Services and products referred to herein are trademarks, registered trademarks, servicemarks, and/or registered servicemarks of their respective trademark or servicemark owners.