synthetic option position to replace an apartment building?

Discussion in 'Options' started by h hubbins, May 7, 2008.

  1. recently a poster commented that is is more efficient to sell puts than it is to write covered calls.

    i'm interested in some input on this idea given the following situation:

    I own an small apartment building may sell it and use real estate securities to earn income (hopefully more income).

    REIT indexes (ICF, IYR) are prefferable since they are indexes and therefore diversified. IV is usually pretty decent and div yld is over 4%.

    Is it better to write 2% otm covered calls or sell 2% otm puts? In order to get the dividend the underlying must be owned.

    To maximize premium selling monthly options is probably best but I assume that the months in which the div is paid this will be taken into account in option pricing.

    Any thoughts on selling puts vs. writing covered calls and capturing divs?
  2. i only recommend selling premium on diversified indexes or etfs. to keep this stradegy safe you must eliminate specific stock risk. a reit etf is still too narrow.
  3. vhehn- understand your point but yield is double the S&P and option IV is high so i'm willing to take a little more risk.
  4. dividends will be factored into the premium you recieve.
  5. o.k.- thanks. i'm going back to my finance class in the late 80's and trying to remember the options theory a little.

    so if the etf is going to go ex div in jun then it will be factored into the jun puts and calls.

    if the div will be 70 cents then that will be factored into the at the moneys that day. but how much will it be factored into a 2% otm put 3 weeks ahead of time?
  6. If you look at any of the options pricing models, for example Black Scholes, you'll find that dividends are already part of the formula and thus are priced into your option premium (even 3 weeks prior to the dividend date), just as the previous poster mentioned. Iow if the dividend falls due during the life of the option then it's already factored in.
  7. thanks!