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Archive for December, 2011

My Favorite Options Trade

Today’s post is the reason that I wanted to provide an explanation of a stock collar.  That is because my favorite options trade of all time involves the use of the collar.  If you missed that post or really don’t understand what a collar is, you should go back and read it.  Otherwise, keep reading.

Now this trade is not mine.  It would be great if it were, because then maybe I would own a professional sports team.  Although I would have chosen football over basketball.  Because this trade is not mine, I am having to go by news reports but the principles remain the same even though I can’t provide the minute details.

How to Save a Billion Dollars

I am sure that you have heard of Mark Cuban, the billionaire owner of the Dallas Mavaricks who won last year’s NBA Championship.  I suspect that you may also know that Mark Cuban became a billionaire by helping to found and grow the company Broadcast.com with a partner, Todd Wagner in 1995.  He ended up selling to Yahoo in 1999 for $5.7 billion in stock.

Now I am not sure where Mark Cuban came up with the idea, but it turned out to be brilliant.  Again, investing in the rearview mirror is easy.  It is managing investments in real time that is difficult.  The 14.6 million Yahoo shares that Cuban had were valued at $95 each or almost $1.4 billion.  That is a lot of wealth to be concentrated in one position so Mark Cuban ended up structuring a collar that allowed for some upside but limited risk of loss.

Here are the details of the trade:

  • A total of 146,000 put contracts with a strike price of $85 per share were purchased.  The cost of these were offset by
  • The sale of 146,000 call contracts at a strike price of $205 per share (zero cost collar)
  • Expiration was 3 years away

What this meant was that Cuban could more than double his money and take advantage of any rise in the stock price of Yahoo up to $205 per share but would only lose $146 million at most.  He could still walk away with $1.2 billion even if the price of Yahoo cratered.


Well, it turns out that the price of Yahoo stock rose to $237 per share in January of 2000 which meant that the trade didn’t look all that smart.  But as I have been learning in the stock market, it never pays to get greedy!  That’s because a little over 2 years later in late 2002, the internet bubble had burst and Yahoo was trading at $13 per share.  Brilliant!

The end result was that Mark Cuban managed to save himself $72 per share in lost wealth or just over $1 billion dollars.  Now he was able to diversify into other investments.

Again, I cannot tell you exactly how he came up with the idea but obviously someone who knew how to protect capital and wealth felt that this particular collar trade was a good idea, and I would have to wholeheartedly agree.  And that is why it is my favorite options trade of all time!  Maybe someday, I can replace it with my own.

Readers:  So what do you think?  If you hadn’t heard of the collar, I doubt you would have heard that Mark Cuban managed to execute one with great effectiveness.  But I bet you had heard of Mark Cuban!  Feel free to comment below.


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8 comments - What do you think?  Posted by Cash Flow Mantra - December 23, 2011 at 5:45 am

Categories: Investing   Tags: , , , , , ,

An Explanation of the Stock Option Collar

Since I will likely be doing away with my Weebly site on options and pursuing other self hosted blogs, I wanted to write this post here on CFM to explain what a collar is.  There is not much written in books about this type of trade, but it is one that I have been working with in my retirement accounts since 2007.  The reason that I am choosing to write this post now will become obvious later but suffice it to say that understanding it is important if y0u really want to have a good knowledge of options.

Collar Definition

In reality, a collar is really not all that difficult to understand.  It consists of owning a stock (being long), owning a protective put against that stock, and selling a covered call against that same stock.  As always, a real-life example is in order so I will provide just that.

You may have read that I own Intel stock in one of my retirement accounts.  This means that I am long shares of INTC.  I also own put options to protect me against a disastrous drop in price of INTC, as might occur should the company miss earnings.  I currently own the January 2012 $20 puts.  This means that if INTC drops to $15 next week, I can still sell my shares for $20 each.  You can think of put options as portfolio insurance just like homeowner’s insurance if your house burned down or was destroyed by a tornado.

However, insurance costs money.  The puts that I purchased cost me 11 cents per share.  Plus they expire in January.  Even though 11 cents is not a lot of money if I did that every month for 12 months, I would be out $1.32 per share.  That would eat into my returns and wouldn’t make me very happy.  So protective puts can be useful when needed but a waste of money if not needed.

Enter the Collar

So in order to fund the cost of the put options, many investors will establish a collar and sell a covered call against the shares.  It is even possible to make money on the creation of the collar although you don’t often hear about it being used in this fashion.  I was able to sell the January 2012 $25 strike options on Intel for $1.05 per share.  I even only did this on half my holdings so that I could partially participate in any rally.

The net effect was that I was able to pay for the cost of the protective puts and make a small profit on the side.  I received 52.5 cents per share for the covered calls ($1.05/2 since I only sold on half the shares) minus 11 cents per share left me with 41.5 cents per share before the trading commissions.  With commissions I netted 39.5 cents per share.  Plus I received 21 cents per share in dividends on December 1st.

Retirement Account Strategy

I end up doing this a lot on the stocks in my retirement account.  You see, I am not interested in losing a lot of money.  In 2008, I was down 18% because of the collars unlike some of my friends who were down more than 50%!  I would rather protect my capital and decrease volatility while missing out on big gains.

That is why I am shifting more of my funds into stocks that will be paying dividends.  Even though I have almost 3 decades before I will have to start taking distributions, I want to go for steady growth and perfect my methods using the collar for protection of capital.  That way, I can take advantage of being invested in stocks while decreasing volatility and earning income.

Hopefully, this has been fairly easy to understand.  Now, I will confess that I have made mistakes in managing the collars because prices are constantly changing, and I am periodically making adjustments.  The mistakes have come when I fail to follow my own rules (isn’t that always the case).  I figure in three decades I will be more disciplined.  So, one of the commitments that I will have to make for 2012 is to follow my own rules!

Readers:  Is the collar fairly easy to understand conceptually?  What questions about the collar do you have?  Feel free to ask or discuss in the comments.

Be sure to follow me on Twitter @cashflowmantra!

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12 comments - What do you think?  Posted by Cash Flow Mantra - December 21, 2011 at 6:00 am

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Follow Up On Bloggers Making $1000 Per Month

Several months ago, I wrote a post about bloggers making $1000 per month.  I realize that is not a lofty goal working 40-50 hours per week on blogging as a full time source of income.  But I was curious if a part-time blogger (such as myself) could actually achieve that level of earnings so I began to search for some who had achieved that level and also were holding down full-time jobs.

I went to many of the personal finance blogs that I read and began to search for earnings reports to see what clues I could gather.  I also asked for anyone who was willing to share in the comments whether or not they made $1000 per month as a blogger while still working.

Why $1000?  Because that amount seems like a fairly significant amount of money.  Four figures sure sounds better than three figures.  But also because it has been a goal of mine since I know that $1000 would make a big dent in college expenses that I will be helping to pay as my kids get older and start moving out and heading off to college.  I had actually given myself until July 2016 to get to that number but was beginning to wonder how possible it was which was the point of the article.

Part-Timers Making $1000 Per Month

Derek at Life and My Finances is one of those bloggers who is able to make over $1000 per month as a part-timer.  In fact, Derek is the one that really got me to thinking about the possibility of being able to make $1000 monthly.

Joe at Retire by 40 is another blogger who is able to make over $1000 per month using his blog.  It is impressive to see the progress that these 2 bloggers have made month after month.

I wasn’t able to get many bloggers to self-identify themselves following the post, but Andy from Tight Fisted Miser did.  His earnings are impressive as a part-timer.  Well over $2000 per month.  You can check out his latest earnings report.

Charles at Money Green Life made over $1500 in August which makes the grade.

Darwin over at Darwin’s Money also makes well over $1000 per month as a blogger.  He has got plenty of projects that he works on, although I can’t confirm that he has a full-time job.  I may have read it somewhere, but it can be hard to keep track without taking notes.

Another One for Your List

There is another part-time blogger who definitely works full-time (about 50 hours per week) and usually gets up about 4:30-5 each morning to write (although I will be sleeping in til 6 tomorrow since I am writing this at midnight).  In addition to being a part-timer, I managed to earn just over $1000 per month online for November 2011.

Needless to say, I was quite shocked and pleased.  I was able to use some of that money to pay off a credit card.

I was also convinced that if I could do it, anyone could.  Maybe they couldn’t make $1000 per month blogging, but there had to be other ways of making a side income that people could use to pay off debt, help with bills, build an emergency fund, or somehow enhance their lives.

New Blog Idea

So I developed an idea for a new blog and contacted the one that I felt inspired me to step up my game and make it all happen, Derek from Life and My Finances.  Together with Melissa from Mom’s Plans, the three of us will be working to provide our readers with a weekly idea for making an extra $1000 per month on a part-time basis.  These will not only be online ventures but offline as well in case someone is not computer savvy or has no real interest in internet income.

The blog is called Grand Per Month and we will officially start the posts on January 2nd appropriately enough with a post by Derek on “How to Make $1000 per Month Blogging”.

Won’t you join us and make 2012 the year when you are finally able to build up that emergency fund, pay off that credit card, or take a little vacation?  Won’t you make it a year when you commit to making an extra grand per month?  What would you do with $1000 per month extra in your pocket?  Please share in the comments below!

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43 comments - What do you think?  Posted by Cash Flow Mantra - December 19, 2011 at 6:00 am

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