Kia Ora Tackle!

Since the last blog, I’ve made my way into the iconic South Island of New Zealand. “This is the place” as Brigham Young once said. That, or maybe Loyd Christmas’s statement on Colorado as fitting: “It’s a place where the beer flows like wine and the women flock like the salmon of Capistrano”. The point is that New Zealand rocks hard and will always have a place in my heart. In fact, I am seriously considering a move to this great nation. As you will see or have seen in the power montage it is a country chalk full of pristine landscape and natural beauty which is unmatched throughout the world. The people that inhabit these islands are on par in about every way imaginable and complete and compliment this amazing place. It’s heaven on Earth, folks!

So, the day I arrived on the South Island I received an email from Tim Justice introducing me to one of Tackle’s longtime students, Owen Malcolm. I have never been acquainted with the guy before but was keen on meeting him. Anything for our students, right? So, we made arrangements to meet up and when I pulled up to Owen’s driveway (which is a bit of a distance from his and his partner’s house) and he was standing there waiting for me. So… I opened the door, brushed some trash and empty beers bottles aside, and ole Owen hopped on in. It took about 30 seconds before we both realized we are likeminded individuals, both potentially carrying a slight case of down syndrome in the mix of it all. In short, we had heaps of fun that night. We talked shop, trading, farming, religion, and politics well into the early morning. He has an awesome partner (girlfriend) and an amazing place right on the ocean, surrounded by acreage and subtropical forest. I can’t really say anything bad about the guy, he’s definitely one of the coolest cats I’ve met thus far… If all goes well with the remainder of the trip I’ll be back his way to do a little mentorship with him. Thanks for everything my man!

As mentioned in the interview Owen is a bit suspicious of the market since the latest drop. Indeed it has had a nice consolidation and slight northernly jump but this next week is essential. Either the market will continue it’s bullish run and what we saw a couple weeks ago was nothing more than a hiccup. That, or, what we saw is the beginning of a market cycle breakdown and what we saw in terms of consolidation and bullish retracements was actually the forming of a kiss of death (K.O.D.).

Now, my personal bias is that what we saw was nothing more than a hiccup. But, then againI’veve been trading long enough to know that these things take time to play out and it’s best to wait on the side lines until support or resistance is broken; that, or be properly hedged as volatility settles down and direction is set. For example, in my personal accounts I have most of my stock positions “collared” whereas my commodity positions are just “covered”. So here is our teaching moment, folks. What does covered and collared mean, exactly?

Collar Trade:

Well, the term covered refers to the Covered Call (of which you can watch videos of in the video vault on the Tackle website). So when I say I am covered I mean that I have sold call options against my position as insurance. To collar a position, however, means that you up the ante on the insurance and completely ensure the position using a combination of selling call options (-1 call option per 100 shares owned) and buying put options, (+1 put options per 100 shares owned).

Typically, you want to buy puts and sell calls at the same strike price in the same expiration month. So let’s say you are selling calls 30 days out @ the 32 strike price. Well, to completely collar the trade I would as well need to buy put options @ the 32 strike price—which should cost roughly the same as what you received in premium for selling the calls. So, it’s insurance for free if you really think about it.

Now, let’s say I want to collar a position for an indefinite amount of time. In that case , would sell/buy more than 30 days out. Maybe I will select 45 days, or maybe 60. It just depends on why you’re collaring the position. For example, maybe it’s for an earnings announcement. Well, in that case sometimes 30 days is sufficient and I’ll just break down the collar after earnings are announced. Now, If its something more long-term, then more time is required, obviously.

Also, let’s say you create a collar trade and you very rapidly receive more than 75-85% of premium on the calls. Well, just go ahead and the put options run and buy back the call options and then re-sell another round (assuming the position is still going down) at whatever strike price that is closest to .40 Delta. Indeed this butchers the collar trade and morphs it into a “married put” covered call combo but it is something that is effective when a position is plummeting and plummeting for a substantial period of time.

Lastly, some traders only use collar trades for worse case scenarios and sometimes fair better with the covered call when markets are functioning correctly. When they are not, however, it’s a hell of a trade to have in your bag of tricks. I personally fall into the “use it when its needed” school of thought. But then again, it’s a hedging strategy that has saved me a lot of money in the past.  You can check Coach Tim explaining the Collar Trade HERE.

Beyond the above-mentioned, that’s all I have got for you this week. Next week I’ll be showing you more of the South Island and other traders from the Tackle community here in New Zealand. I also will be joined by my mother and grandmother for a couple weeks…which will be awesome! But for now, I am hunkered down in a hotel waiting out the Cyclone Gita as it hits New Zealand. This is a first for me. Fortunately, I have enough beer and potato chips to last me a couple days. Wish me luck!!!

Cheers,

Bob Shannon