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2008issue C081-6

A long-stock case that sizes cash risk, then stays open with a protective put, covered calls, and a collar

A historical equity case sizes one long-stock sleeve so a 10% to 13% reaction stays near 1% to 2% of total capital, then buys a protective put so the cash loss is known while upside stays open. Later covered call writing, and if needed a protective collar, are used so the same holding can remain open through ordinary pullbacks.

  • Size the long-stock sleeve first so a plan that must live through 10% to 13% reactions can still keep that name’s cash loss near 1% to 2% of total capital, then buy a protective put instead of relying only on a wide stop.
  • Shares plus a protective put create a limited-loss, still-open-upside payoff while the put is in force, described as equivalent to a long call after the put premium is subtracted.
  • After a paper profit, covered call writing can collect extra premium with defined risk; buy the short calls back or close the package if price rises through the short-call strike, so capital is not left capped and blocked.
  • A 12% trailing stop can keep a strong uptrend open through ordinary reactions, but a wide stop alone does not tell the trader the cash loss in advance the way a purchased put does.
Entries in this reading3 entries
Current trackProtective collar20 readingsCovered call writing53 readingsProtective put53 readings

Size the sleeve before the options

A long-stock plan that must survive 10% to 13% shorter-term reactions in order to capture a 30% or larger advance can still keep a single-trade cash loss near 1% to 2% of total capital by sizing the position first and then buying a protective put instead of relying only on a wide stop.

With a 30000 account split across at least 10 names, a 3000 sleeve and a 10% stock risk of 300 is presented as keeping that name’s cash loss at 1% of total capital before options are added.

What the protective put changes

Owning shares and buying a put creates a limited-loss, still-open-upside payoff while the put is in force, and that payoff is described as equivalent to a long call after the put premium is subtracted.

In the illustrated 200-share purchase at 14.45 with a 14-strike put costing 0.80, the worst-case loss while the put is valid is framed as 1.25 per share, or about 9%, versus a 12% stock-only stop at 12.70.

Covered call writing after a paper profit

After a paper profit appears, part of that gain can be used to sell covered calls so extra premium is collected with a defined risk. If price then rises through the short-call strike, the short calls are to be bought back or the whole package closed so capital is not left capped and blocked.

If price instead falls while a protective put remains in place, previously sold calls can be bought back cheaper. One worked case shows those short calls declining to 0.30 and a net 80 credit on that overlay.

A later overlay on the same holding

A later overlay that sells stock, sells calls, and subtracts the original stock, put, and call outlays is shown as an 840 result, or 29%, after an intervening drawdown of more than 30%.

Holding the same stock-plus-put-and-call package through option expiration is contrasted with a stock-only close: 117% with the calls versus 53% without, in that single expiration-date comparison.

A wide stop does not pre-state the cash loss

A 12% trailing stop on a strong uptrend can keep a long stock open through ordinary reactions until a later trendline break, but a wide stop alone does not tell the trader the cash loss in advance the way a purchased put does.

Goodyear (GT) from the May 2006 entry through January 2007 expiration

GT is bought at 14.45 on 4 May 2006, slides through a 12.54 stop print on 31 May, and prints 10.57 on 28 July — a cash drawdown a 12 percent stop would have realized as a loss — then recovers and reaches 24.22 at the 19 January 2007 option expiration. Weekly points were read from the article’s daily candlestick chart and pinned to the dated prints stated in the text.
GT is bought at 14.45 on 4 May 2006, slides through a 12.54 stop print on 31 May, and prints 10.57 on 28 July — a cash drawdown a 12 percent stop would have realized as a loss — then recovers and reaches 24.22 at the 19 January 2007 option expiration. Weekly points were read from the article’s daily candlestick chart and pinned to the dated prints stated in the text.Goodyear Tire & Rubber Co. (GT) · daily candlesticks, sampled about weekly · 2006-05-04T00:00:00.000Z to 2007-02-02T00:00:00.000Z

The extracted figure has no printed y-axis numerals. Dollar levels are scaled from the author’s stated GT prints (14.45, 12.54, 10.57, 16.85, 24.22) across the May 2006–February 2007 window; points between those prints are approximate to about half a dollar.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
8 of 19 in the Protective collar track
20081-1 pp.Next on Protective collarAssignment as a planned handoff from put spread to collarPairing a short put with a lower long put creates a credit option spread whose loss is capped at the strike width minus the net credit.
All readings on this track · 19 readings
  1. 2002Rebuilding a long-stock book with calls, puts and collars
  2. 2004Constructing protective collars and reading cheap premia
  3. 2004Protective collar, straddle exits, and index settlement
  4. 2005Collar and backspread construction as a pairing problem
  5. 2006Protective collar, net delta, and implied volatility
  6. 2007Interest as a sizing filter on collared stock
  7. 2008Collar versus bull call spread: capital and inventory
  8. 2008A long-stock case that sizes cash risk, then stays open with a protective put, covered calls, and a collar
  9. 2008Assignment as a planned handoff from put spread to collar
  10. 2008Protective collar rolls and straddle entry in extreme volatility
  11. 2010A margin call is a late exam in position size
  12. 2011Protective collars and covered calls after a volatility shock
  13. 2011Mid-life butterfly and collar adjustments across range and correction
  14. 2012Stacking a 1-by-2 overlay and a collar on underwater stock
  15. 2013Odd-lot mini-options for covered calls, puts, and collars
  16. 2014Zero-debit call-ratio repair for a broken long stock
  17. 2014An open collar funds the puts without capping every share
  18. 2018A protective collar as an event-risk budget
  19. 2020Constructing position-level collars around unsold holdings
By fieldOptions and volatility435 readingsBy year2008150 readings
All 20 readings tagged Protective collar
Also on Protective collar5 readings
2002Rebuilding a long-stock book with calls, puts and collars2006Protective collar, net delta, and implied volatility2008Collar versus bull call spread: capital and inventory2013Odd-lot mini-options for covered calls, puts, and collars2014An open collar funds the puts without capping every share