The dividend collar has been a favorite strategy in the virtual portfolio, because it promises to deliver risk-free, double-digit returns. But is it really possible?
The strategy has a three-part hedge. Long stock hedges (covers) the short call; the short call pays for the long put; and the long put eliminates all market risk below the strike, hedging long stock.
The trick is to find situations in which parity between call and put are enough to create a zero-cost trade. By entering the position (long stock, long put and short call) before ex-dividend date and using options expiring after, the ideal dividend collar will annualize out in double digits. You only need one per month to make it work.
Even so, I have located and opened 9 dividend collars over the past three months, in the virtual portfolio at ThomsettOptions.com … the outcome:
1 is an installment dividend collar, meaning the long put was set for many months ahead, to be paid for with a series of short covered calls. The outcome cannot yet be known but I am confident it will end up profitably.
2 were calendar dividend collars and converted to covered calls. In this variety, the long put expires in the next cycle and the short call expires later. When the put's expiration arrives, the position is converted to a covered call with a short call basis equal to the net credit between options.
3 of these remain open as of today.
3 were closed and all resulted in double-digit annualized returns of 19.8%, 10.3% and 12.3% - and remember, with the zero-cost or low-cost net options and long put covering market risk, this is a risk-free trade (because the zero-cost put protects against a decline in the stock's price).
So the proof of this theory is in the performance of these 9 issues. I have opened many more before these, but these are the actual virtual portfolio trades entered since I began the newest service on the site, Dividend Collar Watch List This is a service published every few days with descriptions of companies whose ex-dividend date comes up in the near future. Each company is described in both fundamental and technical ways - I compare dividend yield and history, PE ratio, revenues and earnings, and debt ratio for all of these companies. I also identify likely strikes and examine whether or not they will work; and assuming the fundamentals are strong enough, I also identify candidates for calendar dividend collars (with different expiration months, making it more likely for the premium to work out as a credit and making early exercise before ex-date highly unlikely.
You can subscribe to the Watch List by going to the link above. And if you would like to learn more about the dividend collar as a strategy, you can also order the book I wrote on this subject, Options for Risk-Free Portfolios published by Palgrave MacMillan.
The dividend collar is not just a theory or concept; it actually works and while patience is required to locate these amazing strategies, they are plentiful.