4. Platinum Collar
(See Random Walk’s text PLATINUM)
This is a Random Walk proprietary strategy that attempts to outperform the collar, married put or covered call strategy. Taking the process to a slightly more advanced level yields remarkable results.
By substituting the long put with a put butterfly spread, a trader can get right up to the current stock price with his hedge. This powerful adjustment avoids the pitfalls of purchasing an out-of-the-money put which allows for large amounts of slippage in the stock, while avoiding the high cost of purchasing an at-the-money option for a safer trade.
This blend is not very complex, but a little study is needed in order for a trader to strategically trade the appropriate strike prices. When done statistically correct, the resulting position can be a thing of beauty, and at the same time provide adequate protection for almost any normal stock movement.
A glance at the graph below shows how, with Random Walk’s Platinum Hedge, the position makes more money than a collar on a move higher. In addition, the stock can fall (in this example) over $7 without incurring a loss. Suppose stock movement was like a coin flip where each toss resulted in the stock either moving up or down $5. With the Platinum hedge a move higher by $5 results in a $6.17 profit (more than would have been gained by simple long stock), and move lower by $5 results in a $1.17 profit (where the shares would lose -$5).
