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 www.TheStreet.com and the StockCharts.com 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.
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
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