I loved the example you gave on Research in Motion (RIMM) with the minuscule downside and much better upside. I always try to find those types of collar situations where I can tell a client the worst-case scenario with a nice upside. A lot of times I try to sell half the position size in calls while fully protecting the downside. I use the proceeds from the call sale to cover as much of the put cost as I can. Based on volatility, it seems like there are much better candidates for such strategies. Is there an easy way to find attractive names to use with this strategy? Thanks in advance, -- M.L.
article on using LEAPs to collar positions mentioned just three basic elements to consider when scanning for attractive candidates: the underlying stock's price, the options' implied volatility and the life span of the option contracts used. As each of these inputs increase (i.e., the higher the stock's price, the greater the volatility and the longer the expiration period), the spread between strikes becomes wider at which a "no cost" collar (the further an out-of-the-money call can be sold for the same price as an at-the-money put) can be established, creating an increasingly attractive risk/reward profile.
However, one thing I didn't factor into the equation is the impact that interest rates have on the asymmetrical pricing of long-term options. But with rising rates in everyone's frontal lobe, it makes sense to illustrate how higher interest rates would theoretically create an even-better pricing structure for LEAP collars.
Going back to the original example, which was based on XYZ trading at $100, with an implied volatility of 50%, the table below compares the theoretical call strike prices that would equal the value of $100, or an at-the-money put option across one- and two-year time periods, and 2% and 4% short-term (one-year borrowing cost) interest rates.
As you can see, if the annualized cost to borrow money moved from 2% to 4% and the life span of the position was two years, you could sell a call with a $120 strike price for the same price as the cost of buying a put with the same expiration and a $100 strike price. This would mean you'd created a position that removed all downside risk and yet offered a potential upside of 20%.
While these numbers are theoretical and don't yet reflect current yields, they illustrate a useful strategy for options investors to use if we move to a higher interest rate environment. Owning a stock that has no downside risk, but a 20% profit potential over a two-year period, certainly seems like a legitimate alternative to parking money in a two-year note that earns 5%, or even 8%. But this carries the short-term risk of loss of principal, should rates rise and you need to sell the bond before maturity.
Perhaps the best way to scan for candidates is to simply screen for stocks that are trading above about $70, (basically the tipping point that will offer a limited risk/higher reward collar) and have LEAP options with an implied volatility above 45%, and hope for interest rates to soar.
Let's Get Historical
I appreciate your articles/commentary, and I was wondering if you could help me in my own search for more options information. I'm looking for a database which contains historical pricing of stock options for the past five to 10 years. Is this available anywhere? So far I have only been able to find historical stock prices, not stock option prices. I am very interested in looking at stock option prices for certain stocks I track and examine them at different inflection points. -- B.G.
Because it's nearly impossible to write an options article without mentioning implied volatility, it also follows that the most frequently asked questions I get are where options pricing and volatility data can be found. At the risk of being repetitive, I'll again suggest iVolatility as a good starting point. Unlike some vendors that simply provide raw data downloads (usually for institutional customers, who then have their own proprietary number-twisting software), it offers a host of tools (some free, some on a subscription basis) that cover the gamut of basic options calculations to some real "mad scientist" standard deviation, correlation, and skew-distribution stuff. To find out more about obtaining historical data downloads and in what forms they can be delivered and analyzed, look at
One year of data for the historical and implied volatilities of all strike prices across various expiration periods for 10 different securities would cost about $75 for a one-time download. To keep those 10 names updated on a daily basis would run about $8 a month. If you expanded the number of stocks to 300 and wanted four years of data (the database only goes back to November 2000), the initial download would cost around $3,500, and daily updates of the 300-name portfolio would cost about $120 a month. I'd suggest exploring the site, seeing what interests you, and attempting to acquire a fairly customized combination package.
There are some other vendors, such as
OptionMetrics for more industrial-strength downloads and full front-end feed systems that supply data going back to 1996. OptionMetrics also offers strictly text files and accessible graphics, but its more intensive analytic tools might require some sophisticated software. In addition, some of the packages command a price that is generally prohibitive to individual investors.
These are certainly not the only resources, nor am I endorsing them as the best. They're simply two good starting points. Please pass along any suggestions, recommendations or other options-related resources you've discovered and found useful.
Steven Smith writes regularly for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He was a seatholding member of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) from May 1989 to August 1995. During that six-year period, he traded multiple markets for his own personal account and acted as an executing broker for third-party accounts. He invites you to send your feedback to