1 / 12

What is Collar Investing?

What is Collar Investing?. Collar investing is the simultaneous purchase of a stock and a put option, along with the sale of a covered call option; the put contract protects the new stock while the covered call limits the stock’s upside, but also finances the put premium.

yul
Download Presentation

What is Collar Investing?

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. What is Collar Investing? • Collar investing is the simultaneous purchase of a stock and a put option, along with the sale of a covered call option; the put contract protects the new stock while the covered call limits the stock’s upside, but also finances the put premium. • The art of Collar Investing is to find those combinations offering the greatest reward with the least risk. • With Collar Investing, the focus shifts from stock selection to collar selection.

  2. Equity Collar Example

  3. Equity Collar Example

  4. Financial Planning with Greater Certainty • Eighty year S&P Average 12.3% • Standard Deviation 20.2% • Actual Return Between 11 - 13% 4 Years • Range -43.35 to + 53.93%

  5. Alternative Asset Allocated Portfolios

  6. Absolute Risk - How to Cope • Types of Risk • Specific Security Risk • Diversify with low correlation stocks • Industry Risk • Diversify with non-cyclical stocks • Style Risk • Diversify with emphasis on Lg Cap Value-Higher Div • Market or Systematic Risk • Un-diversifiable-normally requires asset allocation to non-equity sectors. • Consider Collar Investing

  7. Collar vs. Asset Allocation

  8. Equity Collar Backtest • Observations : • +20%/-10% collar returns = 52%/48% stock/bond mix. • Best 52/48 yr = 28.9% vs. 20% for collar. • Worst 52/48 yr = -23.7% vs. -10 for collar. • Setting asset allocation max loss to -10% needs 19%/81% S/B mix. • +20%/-10% collars 27% less than S&P with std. dev. 41% less.

  9. Collars Vs. Asset Allocation for managing equity risk. • Collars limit systematic risk, allowing higher stock mix. • Collars precisely define risk and reward. • Provide more certainty than asset allocation. • Enable clearer communication with client.

  10. Risk vs. Regret • Investor2 • 100% Equity • Switch to 48% Debt 52% Equity Investor1 • 100% Debt • Switch to 48% Debt 52% Equity Both have same risk/return tradeoff Now Stocks rise by 20% Bonds rise by 5% • Pleased at return • Has some regret No regret for collar investor if satisfied with pre-determined range of returns

  11. Final Comments • The equity collar is bounded by its predetermined limits and not the assumption that the historic pattern of returns will present itself in the future. • It reduces the potential regret that an investor may experience from receiving an unforeseen decline in asset values. • The collar is beneficial in reducing uncertainty and helpful in managing systematic risk.

More Related