Stock collar to capture dividend trade?

Discussion in 'Options' started by johnmarg1, Mar 20, 2018.

  1. johnmarg1

    johnmarg1

    What about this trade for prices as of today about 7:18AM PST.

    Buy MSFT at 93.11, 100 shares
    Sell May call 90 strike at 5.80
    Buy May put 90 strike at 2.47.

    Capture dividend of .42 per share plus .16 cents for collar. Yield of 3.8 annualized. For those who want a safe higher than market yield with no loss.
     
  2. Robert Morse

    Robert Morse Sponsor

    That is not a Stock collar. That is called a conversion. It is unlikely this will get priced wrong by the street.
     
    nbbo likes this.
  3. So in that, you collect 3.33 differential on the premium. If stock goes to 90, you are down 3.11 on the stock. Isn't that a 22 cents delta, plus the dividend?
     
  4. spindr0

    spindr0

    Unless you included commissions, conversion price is off. Regardless, if MSFT is ITM at ex-div, you are not likely to get the dividend --> early assignment.
     
  5. toc

    toc

  6. johnmarg1

    johnmarg1

    It is set beyond the ex dividend date of May 16. As far as early assignment would that happen with the assignment price more than 2 dollars over the purchase price? If that is the case then I would collect that profit? Of course, i would hope to close the put before that to capture some of that profit too?
     
  7. johnmarg1

    johnmarg1

    Not sure what you mean by priced wrong. Those were actual prices at the time I listed. Do you mean something else?
     
  8. Robert Morse

    Robert Morse Sponsor

    They will not price a delta zero spreads in a way they lose and you profit.
     
  9. newwurldmn

    newwurldmn

    You receive 16 cents for the collar. But will pay at least 40 cents to finance this (assuming you work at a large bank that funds at libor). so you are in the hole 24 cents after financing costs. If you get the div of 42 cents, then you make 18 cents. If you don't get the div you will lose 24 cents. The market is pricing like a 40% that you won't get the div.
    And given that whether you get the div is almost entirely based on the stock level, you can construct a similar $ payout with a lot less balance sheet risk.
     
  10. Questions -

    Is my math wrong - he will make 22 cents min on the collar, no?

    Why would he have to pay 40 cents to finance the transaction newwurldmn? If he has money in his acccount to finance it?

    Why might he not get the divvy if he holds on and after ex-divvy date?

    Thanks!
     
    #10     Mar 20, 2018