Put A Collar On Hewlett-Packard Stock, Not Your Cat
Dragonfly Capital | Nov 25, 2014 11:33PM ET
Some things look great with a collar on them. Maybe not your cat though. But a collar for protecting a stock position can look fantastic.
Last week I wrote about the Cup and Handle pattern in Hewlett-Packard Company (NYSE:HPQ) here. And if you bought Hewlett-Packard based on that idea, or were lucky enough to pick it up at the bottom on October 15th, you are now sitting with a position, and possibly a good sized gain into the earnings report tonight. So now what do you do? Pull out that collar.
Heading into earnings, Hewlett-Packard, is testing resistance at 38. The chart continues to point higher, but anything can happen when they report. The options market shows very large open interest at the 37 strike this week, which could easily hold it in place. And the at-the-money straddles show traders expect a $1.60 move by Friday, just not what direction. There are sizeable block at 36 and 35 lower should it pullback. And activity ahead of earnings sees interest in the 38.50 calls.
The chart itself shows shows some support at 34.50 almost 10% below, and resistance possibly next at 40. The momentum indicators also point higher. That leaves plenty of room against the straddle range of about 36 to 40.
Adding a November 38/36 Put Spread December 12 Expiry 40 Call Collar can give protection and continue to offer upside price participation. This is buying a November 38/36 Put Spread (about 65 cents) and selling a December 12 Expiry 40 Strike Covered Call (about 30 cents). The net cost is about 1% of the stock to protect over 55 downside protection this week, and still allow 5% upside participation without any adjustments.
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.
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