Bear Call - An unusual adjustment

This is an out-of-the-box trade.

If one is bullish on a stock position, it is common to first buy a bull put. If the stock continues to go down, you take ownership of the stock and convert it into a collar by buying a LP and selling a short call to contain the short term down trend.

With this strategy, you assume that the stock will eventually reach bottom and rally because it is fundamentally sound. You buy time by adding the LP and reduce your cost basis by selling the short call.

As the stock reaches support, you sell the Long put. You are left with a covered call.
You can continue to sell call to reduce your cost of the long stock until such time that it is assigned or you decide that it is time to let go of your bullish position

I believe a similar strategy can be applied if you are bearish on a stock especially if it is fundamentally bad and it is only a matter of time for it to go down.

I have an example in the trade for GE

First, I can start with a bear call. Because the market is still bullish, I hope to be able to hold the short position of the stock if it is assigned. With a bull call I get to own the stock if it is assigned at reduced cost. With a bear call, I get to short the stock at a reduced cost.

Upon getting the short position of the stock, I will add a protective Long Call. In the case of a collar, you add a protective Long Put. I will sell a SP to reduce my cost. Effectively, I have a “reversed” collar position.

At the right time, I will sell my Long call and hold on to my “covered put “ position.

When the stock finally shows real signs of turning around, I will close my positions.

The disadvantage to this position is that you will have to pay dividends instead of receiving dividends in the case of a standard collar.

Also, in some cases, you may have to pay some interest to hold on to the short position as you are borrowing the shares.

But often stock goes down faster in a downtrend. So you should be able to close the position for a good profit in a shorter time frame once the downtrend has started.

So the process is this:



This is an unusual trade. Proceed with caution. Suggest you start with paper trade to get comfortable with it before using actual money!