Ring around the collar

The definition of an option collar:

As a follow up to my post on 2/2/2011 regarding APKT, I thought I would expand a little on my use of an options collar to protect the gains. I received numerous questions surrounding my strategy here, and will try to answer those within this post.

The thought process here is simple: you have an enormous gain in one day and want to protect the gains. You have choices here on what you can do - here are just a few:

1. Stock replacement. Sell the common stock and buy a straight CALL. This locks in the initial gains on the common stock and allows participation of further upside - with MUCH less at risk (cost of the call).
2. Buy a PUT to protect the common stock you own
3. Put on a collar (sell an OTM CALL to purchase an OTM PUT). This can usually be done for pennies.
4. Sell the common stock and take the day off. LoL

I had the expectation that the stock would pullback soon, so I chose to put on a collar. I paid $.20 cents to put the collar on. However, one of the downside potentials to this trade is that any further gains are now capped. In the case of my collar, the strike on the OTM CALL was 67.50.

This morning I sent a tweet about the likelihood of the stock being called away, as the price was moving through 69 with great momentum - and thus was a profitable trade for my CALL buyer(s). However, it did not stay strong for long and quickly weakened. The stock currently sits at the 66 level, which is perfectly fine for me.

The next part of this strategy involves the planning of buying back the 67.50 call before expiration. If I see renewed strength on the horizon for the stock, I will consider doing this - especially if the price for the CALL falls under 1.00. If the stock price holds in the mid 60's, I will do nothing and let the collar expire.