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The Amazing Outcome Of The Dividend Collar — High Returns And Low Risk, Is It Possible?

Dividend collars: trades that eliminate market risk while creating annualized double-digit returns. How is this possible?

In fact, it is not only possible but these trades can be found in abundance. I have entered many dividend collar trades in the virtual portfolio, demonstrating that these are not difficult to find. I closed 7 last month and this Friday I have 9 more with expiring options. I expect all to generate double-digit returns. Six of these are calendar dividend collars, meaning the short call expires a month later than the long put. So after the dividend is earned the position is converted to a covered call. Some traders will not like that, whereas others understand that covered calls are acceptable positions, and even better when they earn the dividend beforehand.

Even so, some members have expressed frustration at not being able to find these on their own. I have a few suggestions. First of all, don't try to duplicate my trades. I offer them based on real-time prices, but by the time you see the post, if prices have changed, the transaction probably won't still work. The purpose of the virtual portfolio is to teach the strategy, not to provide anyone with trades. If you learn the strategy, you will find plenty of cases in which the dividend collar works.

Sorry to say, some members try to copy the trades and do not succeed. Even a small movement in prices can turn a profitable position into a loss, and I hate to see that happen. The purpose of the virtual portfolio is to show how it works, not to give you trades to execute. But before you execute any trades, you need to have a mastery of the options rules and risks. No options trader should make a trade based on what someone else has done.

The first step is to master the trade. It consists of 100 shares of stock, one long put and one short call. The net of the options should be a credit so that the premium you receive for selling the call pays the cost of opening the put. Ex-dividend date should occur before the expiration date of the options you use. And you have to enter the trade before ex-dividend date, not on that date or after. To earn the dividend you have to complete the trade before that date.

There are a few varieties of the dividend collar. The most basic one (and hardest to find) is the one with both put and call expiring in the same month, which normally would be the next expiration date from today. You need to enter a trade for stocks with ex-dividend date on or before the option expiration date.

A variety that is quite easy to find is the calendar dividend collar. In this one, you buy a current-month put but you sell the call expiring in the following month. This means you sell higher time value and have adequate credit to pay for the put. Ideally, the strikes should be at or higher than your basis in the stock. If the strikes are lower, the net credit should be greater than the capital loss you'll have when either option is exercised.

The calendar dividend collar has the advantage of avoiding early exercise. This occurs when someone holding a long call wants the current month dividend. When current-month calls are in the money, they might be early exercised, but not always. Those wanting exercise are randomly assigned. But with a call expiring a month later, the chances of early exercise are quite slim. It would only work if the dividend is higher than the cost of the call, adjusted by the intrinsic value at the moment. The chances for good profits are better with current-month dividends, so a "dividend pirate" is probably going to buy contracts expiring soon after ex-dividend date, with plans to exercise and take away stock a day or two before ex-dividend date.

A disadvantage in this position is that once the put expires, the dividend collar is converted into a covered call; but the basis in the call has to be reduced by the put premium. Since you paid for the put with the call, your basis is going to be quite low. This conversion results in waiting for expiration or exercise. You probably will not be able to buy to close the call without taking a loss. So you have to be sure you are willing to live with the covered call for a month after you earn the dividend.

If the stock price falls below the strike, you will exercise the put and dispose of shares at the strike, which will be higher than market. But this leaves you with an uncovered call. So when you exercise the put, you dispose of shares at the strike, but the prudent move is to immediately buy 100 shares at market price. This reduces your basis and will lead to higher profits if the short call ends up getting exercised.

So here is the process I go through every morning - and remember, I find on average two viable trades per week.

1. I look for possible candidates with ex-dividend between now and the next option expiration date. For this, I use the ex-dividend calendar offered at which is at Ex-dividend calendar This provides the ex-dividend date, trading symbol, dividend yield and dividend per share. I tend to favor those paying at least 35 cents per share and with a yield of 2% or more (my rationale here is that the average period is two weeks, and 2% earned in two weeks annualizes out very nicely.)

2. Once I find candidates meeting the criteria above, I next check current values of stock and options. I check not only current month (expiring after ex-dividend date) but also the month after. I use the ask price for the long put and the bid price for the short call. I'm aware that calendar dividend collars are plentiful, so I'm more likely to find these.

3. When I locate a trade with a net credit (including options, dividends, and capital gain or loss), I calculate the annualized yield. This usually works out to double digits, but if not then it probably is too marginal to be worth the trouble.

4. Finally, I check the trade. I never make actual trades reported in the virtual portfolio, because the purpose here is educational and not meant as an advisory service. Even so, it could be a conflict of interest (or perceived as one) if I were to show virtual trades as examples and also make the actual trade. But I do go onto my broker's website (I use Schwab) and enter the trade. But once I confirm the price I would get, I cancel it instead of placing it. In this way, I know the proposed trade is realistic and could be executed according to the quotes I saw.

Following these steps I find ample dividend collar trades. At this moment, the virtual portfolio has open June trades in the following eight:

DB (JUL put and JUL call)

GS (JUN put and JUN call)

LMT (JUN put and JUL call)

OXY (JUN put and JUL call)

SWK (JUN put and JUL call)

ADP (JUN put and JUN call)

TUP (JUN put and JUL call)

LVS (JUN put and JUL call)

Remember the important three conditions to make the dividend collar work:

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 for one-month terms, or for annualized double-digit returns considering combined options, capital gains and dividends.

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 at New book: Options for Risk-Free Portfolios - the table of contents follows:

Introduction - T

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

he 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

Please remember that the trades opened in the virtual portfolio are based on real prices; and you can find them too, with patience and diligent research. I try to provide realistic pricing for all of my virtual portfolio trades, because there is no benefit in suggesting strategies unless they do actually work. I am a firm believer in the dividend collar and I think that you will be, too, once you master the mechanics of how the trades work.

A few blind spots get in the way. Chief among these is thinking of the open options separately. Remember, the short call pays for the long put, so you get these positions for zero cost, at worst. I have heard people complain that when the put expires worthless, they "lose" money. But with the short call paying the premium, you true basis in that put is zero. The same argument applies to exercising the put. If you just buy a protective put, you have to account for its cost when deciding whether to exercise or not. But with the cost at zero, you do not have to be concerned about the put's cost; it was zero due to the combination with a short call.

So think of the strategy as a singular event with a three-part hedge. The cost of the long put is hedged by income from the short call. The risk of the short call is covered by the 100 shares of stock. And the market risk of holding stock through ex-dividend date is eliminated by the long put - a three-part hedge that eliminates market risk and generates double-digit annualized returns.

To gain more perspective on insights to trading observations and specific strategies, I hope you will join me at 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 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. The newsletter is free until August 1; after that, it requires a paid subscription, but it is included free with a membership on the site. Join at Weekly Newsletter I look forward to having you as a subscriber.