The Dividend Collar - Double-Digit Returns And Low Risk Combined In One Strategy

Feb. 23, 2013 1:32 PM ET6 Comments
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Contributor Since 2011

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 Risk-Free Portfolios" and "Options for Swing Trading" (both Palgrave Macmillan). Thomsett also writes for and the Top Advisor Corner 

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 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 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. All it requires is your e-mail address. Join at Weekly Newsletter I look forward to having you as a subscriber.

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