This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Collar Proves a Cool Tool for Hot Stocks

Stocks in this article: COLLX AGG MERFX QAI

NEW YORK ( TheStreet) -- In January 2010, I wrote about a relatively new and innovative mutual fund called the Collar Fund (COLLX) which is managed by Summit Portfolio Advisors.

The basic strategy of the Collar Fund is to buy stocks with a combination of attractive fundamentals and attractive options premiums. Simultaneous to buying a stock the fund will sell a call option approximately 10% out of the money and use the proceeds to buy a put option that is approximately 10% out of the money.

The options trades are done such that the call premium always exceeds the cost of the put. Part of the strategy relies on the fund pocketing the difference for fund holders and the managers take it as a positive sign that the market values calls more than puts.

The other strategic dynamic is the reward-to-risk ratio for each holding, which ideally would be 1.5 to 1 but will not be less than 1.0 to 1. The example I used in the first article to illustrate reward to risk was that the fund buys a stock for $100, sells a call option struck at $110 for $8 and buys a put struck $90 for $6 which creates a cost basis for the stock of $98 ($100 price minus $8 call premium plus $6 put premium). The maximum loss would be $8 per share ($98 down to $90) and the maximum gain would be $12 ($98 up to $110). The potential $12 gain versus the potential $8 loss creates the 1.5 to 1 reward to risk ratio the fund seeks.

The stocks held in the fund are usually quite volatile. At the time of the previous article the top holdings included Rambus (RMBS) and Potash Corp of Saskatchewan (POT). As of June 30, the top holdings included Apple (AAPL) and F5 Networks (FFIV). Despite the holdings being very volatile the fund is actually marketed as a proxy for a bond fund. The option collars greatly reduce the volatility of the fund and the fund literature compares its performance to the iShares Barclays Aggregate Bond Fund (AGG).

Since inception the Collar Fund is up 7.1% vs. a return of 14%, including dividends for AGG. For the trailing 12 months the Collar Fund lags by slightly less than 1%. While that might not seem so great it is important to understand that the Collar Fund does not expose investors to interest rate risk the way a bond fund like AGG does. The Collar Fund has not paid a meaningful dividend so it may not be a real substitute for an entire bond portfolio but it has utility as a tool to reduce the overall interest-rate risk of a bond portfolio (on a price basis, with no large increase in interest rates, the two funds have traded very similarly).

The other role this fund can play is for investors who allocate a portion of their portfolios to absolute return funds. Since inception the Collar Fund has traded right in line with both the Merger Fund (MERFX) and the Index IQ Hedge Multi Strategy Tracker ETF (QAI) , two popular alternative funds. A small slice of a diversified portfolio allocated to funds like these offers a good chance of smoothing out the ride over the course of an entire stock market cycle.

Readers Also Like:

At the time of publication, Nusbaum was long MERFX, although positions may change at any time.

Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback; click here to send him an email.

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 17,356.87 +288.00 1.69%
S&P 500 2,012.89 +40.15 2.04%
NASDAQ 4,644.3120 +96.4780 2.12%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs