Let’s face it, in all likelihood neither you nor I are going to get any sweetheart deals like the Oracle of Omaha did in BofA (BAC) back on August 25. If I’m off base and you do manage to secure a $5.0B preferred stock deal which receives a 6% dividend, a $250M termination clause and the option to exercise warrants to buy 700 million shares of common stock at $7.14; please let me know.

That all said, with shares of BAC making a round turn of about 25% over the last eight sessions and filling in the excitable gap driven by investors wanting to be somewhat like Warren; there are other strategies such as a collar which might be preferred. For bulls still looking to follow in the footsteps of perhaps the greatest value investor of our time; a collar’s moderately bullish risk profile seems an interesting proposition.

With the spread effectively allowing a trader to manage risk to a defined amount courtesy of the long protective put but flexible for those that prefer to take on an even more calculated value-oriented risk should shares ultimately tumble by accumulating stock on weakness; the collar might even appear to make more sense and cents or dollars too.

One collar to illustrate the initial long stock, long put and short call combination is shown in Figure 1 below using the October 6 put and 8 call on seven contracts as of Tuesday night. With shares at $6.99, the spread costs $7.04 as the combined bearish risk reversal which purchases the put and sells the call to finance the protection costs $0.05.

Figure 1: BofA (BAC) 7x October 6 / 8 Collar

click chart for more detail
click to enlarge

Initially and based on a $20K model portfolio, the collar position maintains risk of just less than 4% at $725 below $6 a share and a slightly smaller max profit of about $675 above the 8 call strike come expiration. On the upside though, prior to that third Friday in October, the collar could always see an adjustment to lock in profits and increase the position's profit potential should some recently lost optimism return. That could be happening as of this writing with shares up about 3% near $7.20 in slightly happier conditions. Just in case Wednesday's enthusiasm also proves short-lived though, at a starting debit of under $5K this collar won’t break the bank if plaintiffs pursuing lawsuits wind up doing some collaring of their own.

Chris Tyler