Meet Our Readers: Brian

I’m a proud resident of Calgary, Alberta, Canada

I’ve been investing since 2002, trading options since 2008 and paper trading ICs since Sept 2010.   I use options outside my main portfolio, which primarily contains equities. My main objective is long-term growth as I’m still in my 30s. I work part-time, and stay home with my girls (3 & 5) the rest of the time while my wife’s at work.

In my mind, the most important options lesson: What goes into Black Scholes.

Biggest A-Ha moment: What IV is, and isn’t.

My most experienced strategy: Covered calls. (Can’t sell naked puts in Canadian RRSP accounts, which is where I started.)

What took me the longest to realize: It’s really hard to make money with collars.

What drives me nuts: Waiting for fills! (Though I’ve gotten better.)

Biggest fluke: Selling MFC.TO in August 2008.

What I work hardest at: Being patient.

Favorite options, right now (real $): Selling covered calls on weekly EEM.

Favorite options, right now (paper $): ICs on SPY.

What I just can’t bring myself to do: Trade on margin.

Biggest relief/Former irrational fear: Getting exercised. The police don’t actually come and forcibly confiscate anything.

Thanks to Mark for all the work that goes into this blog!

Happy trading,

Brian.

If you want to participate in Meet our Readers, please send your story, background, interesting incident – or anything else that you would care to share to blog (at) mdwoptions (dot) com.

893

4 Responses to Meet Our Readers: Brian

  1. Mauro 02/05/2011 at 6:21 AM #

    I don’t understand you when you say that it is hard to make money with collars. I think it is a great instrument to decrease the risk. Of course you have a limited upward reward, but that’s not a problem for me.

    i prefer a restricted risk of 10% and a limited reward of 10%, in stead of unlimited profits but maximum risk.

    • Mark D Wolfinger 02/05/2011 at 8:18 AM #

      Mauro,

      I hope that you don’t mind if I reply for Brain.

      Collars are perfect for reducing risk. That’s the rationale for most people who trade collars. One problem is that this strategy is cost intensive and requires two option trades plus one stock trade per collar. For those who don’t use deep discount brokers (and there are many people in that category), it’s an expensive strategy to trade.

      That specific problem is best eliminated by trading an equivalent position – either selling a put spread or buying a call spread.

      I agree 100% and prefer a limited reward and limited risk. However, Brian is simply stating that he found it difficult to attain the desired profits. It s possible that he is blaming the strategy when the true problem has been stock selection. Perhaps he will enlighten us.

      Remember that collar traders usually but at OTM put and sell an OTM call. If the stocks don’t move higher, there are no profits to be earned.

      My guess is that he would have fared better if he had chosen to sell OTM put spreads instead of trading the ‘real’ collar.

      • Brian 02/05/2011 at 10:35 AM #

        Good morning,

        Thanks for replying on my behalf Mark. In hindsight I’m probably not the only one who’s made this type of mistake, but I sure felt frustrated at the time.

        My collar experience arose from a combination of inexperience and unrealistic expectations. I essentially attempted to modify a valid strategy (writing covered calls on stocks I owned) using another valid strategy (buying a protective put) in order to achieve an unrealistic objective (long term returns, with way less risk). I tried back months, front months, moving ITM, moving OTM… everything I could think of. I was using a Canadian RRSP account where spreads and short options are not allowed, with the exception of covered calls. At the time I wasn’t really aware of or interested in spreads. I think I was trying to be delta- and market-neutral, though at the time I honestly wouldn’t have known entirely what the terms really meant.

        After paper trading these collars for about 4 months, with about 8 months of real money covered call writing under my belt, the market dove in 2008. In the aftermath, I reasoned that the real money calls I’d been writing were beneficial, since they’d slightly cushioned the downside of the market dive. I reasoned that having had the puts in place would have been beneficial, since they would have covered the losses in the underlying positions. Thus, with renewed vigor, I continued paper trading these collars as the market began to rise.

        My logic was akin to using the duck-and-cover method (in case of a nuclear blast) in the case of being confronted by a poisonous snake: Not a bad idea in one case, somewhat ineffective in the other.

        After about another 6 months of collar paper trading in a now-rising market it finally dawned on me that I was getting nowhere, other than that my paper commissions would have been making my broker rich. So I gave up trying to hedge my covered call bets.

        In the interim I’ve discovered ICs and am paper trading. It now seems that a collar is fine for protecting a profit, but I wasn’t able to make it generate one.

        Have a great weekend.

  2. Mark D Wolfinger 02/05/2011 at 12:34 PM #

    Brian,

    Unrealistic expectations is a phrase that describes the situation well. You had the limited risk that you wanted, but had to sacrifice a significant portion of your covered call profits when buying those puts.

    Realistic expectations: Take less risk, earn less reward.

    Regarding iron condors: Be aware that this position consists of buying a collar (equivalent) when you sell the put spread. Thus, You are familiar with that idea. However, when you sell the call spread, you are (equivalently) selling a collar with different strikes. This is not so much of a warning against trading IC – instead it is a message to be certain you understand just what you are trading.

    That’s for participating in the meet our readers.