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Options trading: Risk-free and double digits - is it possible?

Posted June 29, 2012

Topics: Finance & Investing

Options traders hear a lot of wild promises about the riches you get trading options, but most of these schemes turn out to be a lot of hype and exaggeration. But here is an idea that actually does work.

The "dividend collar" is a strategy with the following parts:

1. Own 100 shares of stock (you either buy it now or already have it in your portfolio, and it has appreciated in value).

2. You buy one long put as close as possible to the current price (at the money).

3. You sell one call also as close as possible to the money, or higher. The goal here is to have a zero net cost for the options.

4. The dividend collar is opened right before ex-dividend date. You will earn the dividend. (One possibility is early exercise if the call goes in the money; this does not always happen but if it does you get the capital gain instead of the dividend).

5. The position is closed right after ex-dividend date but before the options expire. This happens in one of two ways. Either your short call is assigned and shares called away; or, if your stock value has declined (which is more likely on ex-dividend date), you exercise your put and sell your shares at the fixed strike. In either case, you dispose of stock at a zero net cost or at a small profit.

6. You repeat the process the following month with a different underlying security whose ex-dividend date comes up that month, and so forth every month. The effect of this is that you earn the quarterly dividend every month. For example, if you limit this to stocks earning 4% per year, you get the quarterly 1% dividend every month, adding up to 12% per year. And all market risk of owning stock has been eliminated.

A webinar on this topic is being held at 12:30 (EST) on July 30. This is a presentation of this very exciting options strategy. The webinar is based on the theme that challenges traditional beliefs, two specifically: that high return always involves high risk, and that you have to diversify to avoid risk. I believe both of these traditional points of view are simply and provably wrong. I hope you will attend to see how this idea works. 

The webinar is sponsored by the New York Institute of Finance (NYIF). Please link here: