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Q & A. Covered Calls or Collars When Already Retired


Would you consider a Put Credit Spread to also be an approach for
Retirement Investment money during actual retirement? I get that
impression from "Rookie's Guide to Options". If I understand correctly
from your book, a put credit spread is equivalent to a collar but
wondering if it is a good place for retirement investing or are actual
covered calls a better method?



Hello Greg,

1) Yes, the put credit spread is equivalent to the collar when you use the same strike prices and expiration dates.

2) Yes, to me it's an appropriate strategy for any conservative investor.  The real danger from these spreads is the feeling of overconfidence that may encourage you to trade too much size.  When you own 500 shares, then obviously doing 5 collars is appropriate.  But when the put credit spread involves a small amount of cash per spread, it gets tempting to trade 10, 20, or more credit spreads.  If you have the discipline to trade only the same number of credit spreads as you would collars – then this strategy is appropriate.

Being retired, preservation of capital is important. A collar is far less bullish than owning stock outright or writing covered calls.  But, even collars can lose money during bear markets.  That's why it's important to pay attention to which put strike prices you use for the spread.

Buy the same put when using the credit spread strategy as you would have bought for the collar.

Similarly, the put sold should correspond (same strike, expiration) to the call you would have written, if you were trading a true (rather than synthetic) collar. 

Risk management is the name of the game for someone in your situation.  Of course, I believe skilled risk management is essential for every trader.

3) My usual caveat applies.  I don't believe any specific strategy is 'better' than any other.  There are always trade-offs.  What I want to do is to be certain you see the advantages and disadvantages of each.  Then you can choose which method is 'better' for you, your financial goals, and current bankroll.  For example, a very wealthy person is more concerned with preservation of capital than additional income (Income is important, but secondary). 

4) The covered call strategy allows you to earn greater profits when compared with the collar.  That's a plus for covered calls.

But the collar is a covered call with the purchase of an extra put.  That put makes a big dent in your profit potential.  But, it does guarantee the safety of your investment because losses are very limited.  And you can establish the maximum possible loss by adjusting the strike price of the put that you buy.  Is that a plus for collars?  It depends on how you value profit potential vs. insurance protection.

So, the question to ask is:  do you want that protection?  Do you need that protection?  Would you rather try to earn extra profits, knowing it comes with more risk?

I have no idea if the markets will crash, continue to rally, or do neither.  You can take a chance that all will be well and adopt more bullish strategies.  I'm more cautious and prefer to avoid large losses.

And you can compromise.  You can sell covered calls on your holdings and buy fewer puts.  You don't have to be all collars or all covered calls. 

If you do not already own the shares, then I do prefer selling a put spread to trading the collar.  But if you already own shares, you can combine strategies.  The final test for you is going to be your comfort zone.  Don't gamble.  These trading methods make money over the long-term if managed well, but a market debacle can be very costly. 


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