# Management Of A Dollar Tree Collar

In a previous article related to Dollar Tree (NASDAQ:DLTR), I illustrated a collar position for realizing a potential profit, even if the price of the stock remains unchanged while also providing protection against a large drop in price. A collar position may be entered by selling a call option against an existing or purchased stock and using some of the proceeds to purchase a protective put option. Prices for the initial position as mentioned in the article as compared to the current values are shown below:

 11/14/2011 12/5/2011 Change Purchase DLTR Stock \$78.97 \$83.69 \$4.72 Sell 2011 Dec 80 Call Option \$2.45 \$4.10 (\$1.65) Buy 2011 Dec 70 Put Option \$0.80 \$0.00 (\$0.80) ----------- Total Change \$2.27 or +3%

If we close the position today, we will realize a 3% profit for the position, and as I alluded to in the previous article, the maximum potential profit for the initial position was 3.5%, so we have very little potential profit left, 0.5%, so at this point we should either close the position or manage the position. As a note of reference, if we had simply been long the Dollar Tree stock, a return of 6% would currently be realized, but this is the price we pay for the put option insurance and generating a profit if the stock price remains unchanged.

For managing the position, I determined using PowerOptions' tools that there aren’t any attractive December collar positions, but there is an attractive January collar position available with a 1.5% return if the stock price is unchanged at expiration in January and a 3.1% return if the price of the stock is greater than or equal to \$85 at expiration in January. The new position has a maximum potential loss of 9%.

The specific call option to sell is the 2012 Jan 85 at \$1.95 and the put option to purchase is the 2012 75 at \$0.70. A profit/loss graph of the new position is shown below:

The proposed order for rolling is shown below:

• Sell-to-close 2011 Dec 70 Put
• Buy-to-close 2011 Dec 80 Call
• Buy-to-open 2012 Jan 75 Put
• Sell-to-open 2012 Jan 85 Call

The trade may execute as a four-leg trade with the inclusion of closing the 2011 Dec 70 Put option, but it may not execute as there may not be a bid for the 2011 Dec 70 Put, and if this is the case, then alternately a three leg position can be entered as shown below:

• Buy-to-close 2011 Dec 80 Call
• Buy-to-open 2012 Jan 75 Put
• Sell-to-open 2012 Jan 85 Call

Either way (three-leg or four-leg), the net debit to enter for the trade is \$2.85 [\$4.10 - (\$1.95-\$0.70)]. So, additional capital will be required to roll this position, \$285 per 100 shares.

The new position we are entering has a maximum potential loss of 9%, but in reality it’s more like a 6% maximum potential loss, since we already generated a 3% profit for the initial position.