The Dividend Collar, Combining Double-Digit Returns With Low Risk

The dividend collar is a strategy worth studying. It is a 3-part hedge that could show up to a double-digit annual returns from dividend yield, while eliminating most of the 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. Most (or all) of the long put’s cost is paid by premium income from the short call. And the short call risk is covered by owning 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 every month that can work.

I have written a book in which this topic is covered. Options for Risk-Free Portfolios, available at Amazon.com.

To gain more perspective on insights to trading observations and specific strategies, I hope you will join me at ThomsettOptions.com where I publish many additional articles and a weekly newsletter. I also enter a regular series of daily trades and updates, and provide detailed explanations of my rationale.

Michael C. Thomsett

Michael C. Thomsett is co-founded of ThomsettOptions.com and has also written many options books. These include the best-selling Getting Started in Options (Wiley, currently in production on its 9th edition and with over 300,000 copies sold); and Options Trading for the Conservative Investor(FT Press, 2nd ed.).

 
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