Seeking Alpha

Thomsett's  Instablog

Thomsett
Send Message
Michael C. Thomsett is a widely published options author. His "Getting Started in Options" (Wiley, 9th edition) has sold over 300,000 copies. He also is author of "Options Trading for the Conservative Investor" and "The Options Trading Body of Knowledge" (both FT... More
My company:
Michael C. Thomsett, author
My blog:
Thomsett Options
My book:
Getting Started in Stock Investing and Trading
  • The Dividend Collar - Double-Digit Returns And Low Risk Combined In One Strategy 5 comments
    Feb 23, 2013 1:32 PM
    The dividend collar is a strategy worth studying. It is a 3-part hedge that sets up double-digit annual returns from dividend yield, while eliminating market risk in the underlying stock.

    This is accomplished with long stock, a short call and a long put.

    The stock's market risk is protected by the long put. The long put's cost sis paid by premium income from the short call. And the short call risk is covered by the 100 shares of stock.

    Options for Risk-Free Portfolios: Profiting with Dividend Collar Strategies

    The basic strategy requires three conditions:

    1. Pick a stock whose ex-dividend date comes up in one month or less, and pick options expiring as soon as possible after-ex-dividend date.

    2. The strikes of the short call and long put should both be higher than the basis in stock. This ensures that exercise of either option produces a net profit.

    3. Seek this position on issues with dividend yield of 4% or more.

    If all of these conditions are found, you have a dividend collar. But can you find them? The problem of premium values means that the put is usually more expensive than the call, so the strategy will not work. But I have studied over 700 stocks paying between 4% and 6% dividend, and I have been able to find between five and 20 positions that will work every month.

    I have written a book on this topic, which has been published by Palgrave-Macmillan. It can be ordered on Amazon.com at New book: Options for Risk-Free Portfolios - the table of contents follows:

    Introduction - The Quest for High Return and Low Risk

    Chapter 1 - The Dividend Portfolio, An Overview

    Chapter 2 - Managing and Reducing Risk with Options

    Chapter 3 - The Advantage of the Covered Call

    Chapter 4 - Downside Protection, the Insurance Put

    Chapter 5 - The Collar: Removing All of the Risk

    Chapter 6 - Rolling the Stock Positions: Turning 4% into 12%

    Chapter 7 - Examples of the Basic Strategy

    Chapter 8 - Modification: The Installment Collar Approach

    Chapter 9 - Expanding into the Ratio Write Dividend Collar

    Chapter 10 - More Expansion, Creating the Variable Ratio Write Dividend Collar

    Chapter 11 - Modifying the Strategy with Synthetic Stock Positions

    Epilogue - The Great Value in Patience

    To gain more perspective on insights to trading observations and specific strategies, I hope you will join me at ThomsettOptions.com where I publish many additional articles. I also enter a regular series of daily trades and updates. For new trades, I usually include a stock chart marked up with reversal and confirmation, and provide detailed explanations of my rationale. Link to the site at ThomsettOptions.com to learn more. As a new member, if you buy a one-year subscription, you also get a free copy of one of my books, including this new one just released.

    I also offer a weekly newsletter subscription if you are interested in a periodic update of news and information and a summary of performance in the virtual portfolio that I manage. All it requires is your e-mail address. Join at Weekly Newsletter I look forward to having you as a subscriber.

Back To Thomsett's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (5)
Track new comments
  • Author’s reply » This strategy requires time and effort, but it is worthwhile.
    23 Feb 2013, 01:32 PM Reply Like
  • Hello Thomsett.

     

    Could you put on this trade for a longer period of time, say 3 or 6 months, on a monthly dividend stock/ETF? You could save some on commissions, but I imagine that further out, it might be hard to buy the put/sell the call at zero cost.

     

    Thanks!
    1 Apr 2013, 04:08 PM Reply Like
  • Author’s reply » Actually, I have located some further-out situations in which call and put are attractive, but you are correct that it is more likely to occur within one month prior to ex-dividend date. The intention of this strategy is to move in and out of the position at least once per month, in order to convert quarterly dividends to monthly, leading to the higher yield. I am discovering that there are ample chances for this and at the moment, I have five dividend collars open (MO, GIS, GD, CL, and IBM). All will be profitable regardless of underlying direction, and all have expirations in April or May. I also encourage you to consider getting my book on this topic, "Options for Risk-Free Portfolios" (Palgrave-Macmillan, 2013). Thanks for writing. - Michael
    2 Apr 2013, 10:05 AM Reply Like
  • Hello Michael!

     

    Thanks for your comments and thoughts! After poking around a bit, it seems that American style options are better priced further out in time (3-6 months), but I think the odds of getting assigned early will be high. European style seem to have much higher put premium further than a month out, hence using the front month options. Looked at JNK and HYG as example, but there maybe better European style options that pay good dividend.

     

    I will look into getting your book. Thanks again for your time!
    4 Apr 2013, 04:26 AM Reply Like
  • Author’s reply » Thank you for your comments. I have also been experimenting with a calendar version, with short call one month later than put. This virtually eliminates early exercise risk since no one would want to "buy" all of the time value. I have opened 6 dividend collars over the past month (best one was on IBM) in my virtual portfolio at my website, ThomsettOptions.com -- here they are:

     

    Date

     

    opened description basis

     

    GIS modified dividend collar (4/8 ex-div)
    21-Mar GIS - buy 100 shares @ 47.67 4,767
    21-Mar GIS - buy 1 APR 48 put @ 1.15 115
    26-Feb GIS - sell 2 APR 46 calls @ 0.80 -160

     

    27-Feb MO - dividend collar: buy 100 shares @ 34.10 3,410
    19-Mar sell 1 APR 34 call @ 0.26 -26
    buy 1 APR 34 put @ 0.88 88

     

    Gen. Dynamics (GD) - div. collar 4/8 ex. 0.56 div
    26-Mar buy 100 shares @ 70.31 7,031
    26-Mar buy 1 APR 70 put @ 1.40 140
    26-Mar sell 1 MAY 70 call @ 2.15 -215

     

    Colgate-Palmolive (CL) div. collar 0.68 4/19 ex.
    27-Mar CL - buy 100 shares @ 116.75 11,675
    27-Mar CL - buy 1 APR 115 put @ 0.90 90
    27-Mar CL - sell a MAY 115 call @ 3.35 -335

     

    IBM - div. collar 0.85 - 5/6 ex-d
    28-Mar IBM - buy 100 sh @ 209.85 20,985
    28-Mar IBM - buy 1 MAY 210 put @ 5.40 540
    28-Mar IBM - sell 1 MAY 210 call @ 5.65 -565

     

    COP - div. collar 5.14 ex-d, 0.66 div per share
    2-Apr BUY 100 shares @ 60.31 6,031
    2-Apr BUY 1 MAY 60 put @ 1.32 132
    2-Apr SELL 1 MAY 60 call @ 1.49 -149
    4 Apr 2013, 11:24 AM Reply Like
Full index of posts »
Latest Followers

StockTalks

More »

Latest Comments


Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.