Collaring income?

Discussion in 'Options' started by rickf, Oct 21, 2008.

  1. rickf

    rickf

    Does anyone here have comments/thoughts on the idea of using a collar (short call/long put on top of holding the underlying) as a relatively safe way of parking money to collect dividends?

    IE --

    (1) Buy 100 XYZ at $15.
    (2) Sell a 6-mo $17.50 call, write the $12.50 put for a credit or more likely a small debit. (Sale of the call helps defray/cover the cost of the long put) The call can be OTM or ATM.

    The goal would be to collect a monthly dividend while protecting principal by ensuring the downside risks are hedged by the long put. And if the stock goes up and the calls are exercised, that's fine, too.

    I've used collars on short-term positions (3mo) just to cover things during last spring/summer's volatility, but this approach is looking to use the collar to protect the position while allowing income to come in.

    Thoughts/comments?

    Thx in advance!
     
  2. MTE

    MTE

    Unless you already own the stock for the long term, there's no point in buying it to create a collar, as you can achieve the exact same thing by buying a call vertical spread with the same strike prices.
     
  3. rickf

    rickf

    Yes, I own the stock already, and would be looking to add to it at some point, but not doign so in this market sans 'protection.'

    But to your point, being long a vertical spread (ie, w/o owning the underlying) doesn't grant you the right to dividends, though.
     
  4. MTE

    MTE

    The dividends are priced into the options. Also, don't forget that you have a cost of carry (an opportunity cost) when you are long the stock.
     
  5. You can do what many pros do:

    Buy high-div stock; sell a LEAP OTM--typically two strikes OTM. Theoretically, a stock like PM (Philip Morris) works great.
     
  6. I assume that you meant BUY the $12.50 put?

    I don't know that I'd consider this "a relatively safe way to collect dividends" since you have 2-1/2 pts of downside before your protection kicks in.