Any derivatives people know if knock-in collars are popular (or more importantly profitable)? Basically instead of a normal collar, you could buy a knock-in put and sell a knock-in call. So the collar only becomes active if the stock price rises some x%.
isn’t that a normal collar? You cap your upside for downside protection.
Well the knock-in would be that the collar doesn’t become active until it reaches a certain price point. I was thinking about a situation that’s a bubble, where prices are going up strongly but are overvalued. So you could still participate on some of the upside, but then put in a collar if they go up too much to protect yourself. I was able to create one on Bloomberg’s option calculator, though the payoff looked a bit like a covered call (I’m not sure if Bloomberg’s thing is really capturing what I’m thinking). More curious if people do it or if there are other alternatives.
Your strategy should work. However, you have to consider that knocks are CFDs and not options in the classical sense. You should consider counterparty risk and leverage when dealing with CFDs.
Presumably the knock-in feature is that the option chain locks in your profit to the collar range if the price rises high enough, and reduces the price of the option over a standard collar because you allow for the possibility that the price will not hit the trigger price. If you didn’t have the knock in feature, and the collar range was set above the current spot price, you would have to pay for an in-the-money put to open the position. By doing the knock-in feature, you reduce that price because there’s a probability that the price will never get to the knock-in range.
I just encountered them recently too, so maybe they are becoming more of a thing.
^Yeah, I was thinking about cost.