We’ve all heard it before: the sure-thing, risk-free, never-fail deal. But does it exist?
For several months now, I have been researching a way to make it happen for real. In all, I studied 373 stocks paying dividends between 4% and 6%. My goal: To decide whether it is possible to earn double-digit annual dividend yield by switching in and out of positions right before ex-dividend date. Doing this in all three cycles, four times per year, a 4% quarterly yield translates into 12% per year. But is it practical?
Yes. However, trying this manually is back-breaking. I’ve had to look at proximity between strike and current price, consider timing so that ex-date occurs as close to possible before options expiration, and of necessity, with zero cost or net credit to open the option positions. M y idea for a “dividend collar” is just that: Buy 100 shares, one long put, and one short call at some point within one month prior to ex-date, with plans to exercise out of the stock right after.
This requires one of two actions: The short call is exercised against you if stock rises above the strike, or you exercise your long put to dispose of stock at the put strike. Both should generate a small profit.
This idea is not concerned with capital gains or option profits,. It is all geared toward annualized dividend yield and nothing more. If you do earn a credit on the options or a capital gain on stocks, that’s gravy.
I studied these 373 issues and isolated a few gems where this works. You need only a few per month to make this pan out, and it does indeed. The biggest problem is that if underlying price moves higher than the call strike, you are more than likely to get exercised on ex-date.
In this case, you get the capital gain and keep the call premium, but you don’t get the dividend. It’s also a matter of day-to-day timing. A stock on which this works today might not work as well tomorrow, and vice versa. But I did come up with some good ones. Here are some examples:
Greenhill & Co. (GHL)
Closing price on December 2, 2011: $38.03
Ex-dividend date 12/5/11
Dividend per share 0.45
Options (December expiration, 2 weeks):
Strike Calls Puts
35 3.30 0.65
Actions on December 2:
1) Buy 300 shares $11,409
2) buy three 35 puts - 195
3) sell three 35 calls + 990
4) dividend income + 135
5) estimated transaction fees - 22
Net credit $ 908
Outcomes:
Either calls or puts are
Exercised, net loss (38.03 – 35) - 909
Net loss on stock ($908 - $909) $- 1
Dividend yield:
Quarterly yield (0.45 ÷ 38.03) 1.2%
Annualized (1.2% x 12 months) 14.4%
Pepco Holdings (POM)
Closing price on December 2, 2011: $19.58
Ex-dividend date 12/8/11
Dividend per share 0.27
Options (December expiration, 2 weeks):
Strike Calls Puts
17.50 4.00
20 1.20
Actions on December 2:
1) Buy 300 shares $5,874
2) buy three 20 puts - 360
3) sell three 17.50 calls +1,200
4) dividend income + 81
5) estimated transaction fees - 22
Net credit $ 899
Outcomes:
calls are exercised - 624
Net income 275
puts are exercised 126
net income 1,025
Dividend yield:
Quarterly yield (0.27 ÷ 19.58) 1.4%
Annualized (1.4% x 12 months) 16.8%
Telus Corp. (TU)
Closing price on December 2, 2011: $51.88
Ex-dividend date 12/7/11
Dividend per share 0.57
Options (December expiration, 2 weeks):
Strike Calls Puts
50 4.80
55 1.50
Actions on December 2:
1) Buy 300 shares $15,564
2) buy three 55 puts - 450
3) sell three 50 calls +1,440
4) dividend income + 171
5) estimated transaction fees - 22
Net credit $1,139
Outcomes:
calls are exercised - 564
Net income 575
puts are exercised 936
net income 2,075
Dividend yield:
Quarterly yield (0.57 ÷ 51.88) 1.1%
Annualized (1.4% x 12 months) 13.2%
Telus Corp. (TU)
Closing price on December 2, 2011: $51.88
Ex-dividend date 12/7/11
Dividend per share 0.57
Options (December expiration, 2 weeks):
Strike Calls Puts
50 4.80
55 1.50
Actions on December 2:
1) Buy 300 shares $15,564
2) buy three 55 puts - 450
3) sell three 50 calls +1,440
4) dividend income + 171
5) estimated transaction fees - 22
Net credit $1,139
Outcomes:
calls are exercised - 564
Net income 575
puts are exercised 936
net income 2,075
Dividend yield:
Quarterly yield (0.57 ÷ 51.88) 1.1%
Annualized (1.4% x 12 months) 13.2%
These were three out of more than 10 issues I have located for each cycle. All of these involved ex-dates in December and using December options expiring after those-ex-dates.
Where can you go to find a good programmed method for fast tracking of stocks in real time? This is difficult to find, but one solution is going to be found in systems under development at two SaaS platforms: http://www.quantplat.com and http://www.conservativetrade.com
Thomsett also writes about candlestick charting and other technical subjects and a range of other investing and trading strategies. He blogs in several places on the same range of topics. He writes and trades fulltime. Website: www.MichaelThomsett.com
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