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 Press); and "Options for... More
My company:
Michael C. Thomsett, author
My blog:
Thomsett Options
My book:
Getting Started in Stock Investing and Trading
  • An Explanation Of The Dividend Collar – And A Revised Procedure 0 comments
    Mar 2, 2014 9:01 AM

    I have promoted my strategy, the dividend collar as an options-based hedge strategy that sets up accelerated dividend income for no net options cost, while eliminating market risk on the stock. A reviewer on Amazon.com has taken issue with my procedure, and so I want to explain how I calculated these trades in the past, and how I am revising it from this point forward.

    First, let me just emphasize that the dividend collar does work. I stand by the dividend collar and have many examples that validate my method.

    In my book, Options for Risk-Free Portfolios, I calculated commissions on all trades in an attempt to reflect real-world outcomes as closely as possible. However, observing that the bid/ask spread on soon-to-expire contracts was quite small, I simplified my pricing by using "last trade" values on all examples. This was a flawed approach, since in some instances the spread can be higher than I observed. On my website, ThomsettOptions.com I also used last trade values and did not calculate commission costs, based on my policy that I offer trades as an educational benefit and not as a trade advisory service.

    My intention was to opt for simplicity over exact pricing, in the belief that the basic argument would hold up; and it does. In the interest of 100% accuracy, I have begun entering dividend collars using the following procedure: Upon finding one that works, I enter a trade on my brokerage account. The correct bid or ask price is calculated automatically based on whether the option is long or short, as well as the applicable commission. So I get the exact value of long and short entry trades. But because this is being done in the virtual portfolio, once I get the net value, I cancel the order.

    I have spent most of my trading and writing career examining issues like options trading and writing books, and putting up daily free articles on my website. My goal all along has been to simplify this complex options industry and to help others succeed in trading. Yes, I want to sell books; but I could easily pick easier and less complex topics if that was my only intent. But the Amazon.com reviewer accused me of dishonesty; and anyone who knows me realizes that this is both vicious and untrue. I did not respond to that review because I believe it would only draw attention to the negative comments and result in a very public and potentially negative debate. But I have modified the process of finding and entering trades to put the argument to rest.

    In my Dividend Collar Watch List published on my website each week, I always find some trades that work. For example, in this week's ex-dividends I have found four trades, all yielding double-digit annualized returns net of commissions and based on automatic selection of the proper price for long and short options.

    In one respect, the harsh criticism of my book led to my making this change. I had not even thought of changing the procedure before because I was aware that big/ask spreads are normally extremely small and the commission cost is as well, usually equal to about ¼ point. So even though the effect of these is normally too small to matter, I appreciate the value of exact dollar net values for example trades.

    I hope all of my website members and book readers will understand that my opting for simplicity was well-intended and did not take away from the basic value of the strategy. If anyone has questions about these issues, wants to comment on this message, or see examples of the strategy applied to recent trades, please feel free to write to me directly at Thomsett@att.net - and I will be glad to answer you directly.

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 (0)
Track new comments
Be the first to comment
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.