Comparison of Different Potential Returns
In the table that follows we see the ideal situations: Had we held the trade, we would have had the potential to make over $5,000. Had we simply walked away from the trade by exiting everything at the first sign of a pullback, there was the potential to walk away with a little under $3,000. Finally, if the trade was converted into a bull call spread and the market continued to move up, there was the potential to pick up a little over $6,000.
Hold it $5,112.50
Walk away $2,912
Bull call spread $6,024.12
The questions that a trader has to ask are:
“Is an extra thousand dollars worth the risk of converting the trade from a collar into a bull call spread?”
“Would I have been better off simply holding on to the collar?”
“What if the market had gone the other way—could I live with my decisions?”
The reason why these strategies exist is to help diminish risk. The market will dictate your trading behavior. It is difficult to say what is exactly right or what is exactly wrong when it comes to trading, solely because we work with imperfect knowledge.
The information we see on the screen is our best indicator of what is happening. Even after you have the right tools for success, there is no guarantee that you will always be successful. Keep that in mind as you attempt to trade these and any other strategies in your arsenal.
