Hello, I'm new to options and have been researching ways to limit downside risk.
A collar involves long stock, long OTM put and short OTM call.
Vertical call spread is long call and short call, supposedly gives the same result without having to own the stock, so less capital intensive.
So then I thought that I could just get a vertical call spread and collect interest on cash that would've been used to buy the stock in a collar, but apparently that's priced in?
To give a specific example on 10 contracts on NVDA (I got the numbers from optionsprofitcalculator):
– Max profit for Aug16 950/1220 collar: $174,560.00
– Max profit for Aug16 950/1220 vertical call spread: $162,280.00
The difference in profit between the two is almost exactly how much I would've gotten if I held cash instead of the stock and collected interest on it.
Am I doing something wrong or am I correct that it's priced in?
Collar vs vertical call spread, are cash interest rates priced in?
byu/kokole inoptions
Posted by kokole
2 Comments
I think it’s more the *>$10K per contract* ($7.45×100 vs. $107.73×100) difference between the spread debits….
Yes interest rates (we call this the risk free rate) are priced into options. This is because market maker’s need to borrow money on the cash market to dynamically hedge their positions. Rho is the Greek that indicates sensitivity to changes in the risk free rate.
However what you do in your example doesn’t make sense.
In a collar the short put cancels out the long call. They both have sensitivity to interest changes, but with equal distance to the strike they should cancel each other out.
For a call debit spread, the situation is slightly different, because the unequal strikes, there is a small difference in the sensitivity to interest rate changes. They don’t exactly cancel each other out. However, your sensitivity to changes in the risk free rate cancel each other out partially.
Then there is the collar, of which I’m not really understanding what you mean. Normally a collar means holding 100 shares, selling a call to finance buying a put. So your comparison doesn’t make sense. Because you do hold shares when doing a collar.
And if you’re talking about just the option part of the collar, you’ll see that there is no max loss/profit. They’re theoretically unlimited.
The difference between 174k and 162k is also around 8%, while the risk free rate is currently around 5%.
Now there are positions where the yield is close to the risk free rate. The best example of this is the box spread.