Dividend strat
- Thread starter misterkel
- Start date
Can you show a zero cost dollar on a stock yielding 5%?
I don't understand why a collar long way out is useful in this circumstance. Can you elaborate?
Calls become more expensive then puts. This has to do with brownian motion and how the option is priced. Imagine an option with 100 years. Would the call be worth more, or the put?
But a collar is a call and a put... So you can sell the call for a little more than the put?
That is correct. However when the stock has a hefty dividend, the dividends are priced into the put so they still remain more expensive than the calls
I am a dum dum and am not following.
* Bob buys stock S for $X
* Bob puts in a collar by buying a put for $X-$Y and selling a call of $X+$Z. $Y and $Z are chosen so that the premium paid for the put is offset by the premium recieved by the call
What the heck does this have to do with dividends? Seems like a simple risk management strategy.
* Bob buys stock S for $X
* Bob puts in a collar by buying a put for $X-$Y and selling a call of $X+$Z. $Y and $Z are chosen so that the premium paid for the put is offset by the premium recieved by the call
What the heck does this have to do with dividends? Seems like a simple risk management strategy.
I am not to sure what is going on with all these letters.
IBM = $150
Dividend = 5% or $7.5 annually
1 Year 150 call =$10
1 Year 150 put = $10
You sell the call, buy the put (zero cost collar), buy the stock and voila you have a free ride on the 7.5 dividend.
But what I am saying to the OP is that, this will not happen in real life (with such a large dividend). You could do it on stocks that have a small dividend, but you might as well just invest in tbills
With a 5% dividend in a 2% carry environment and IBM at $150 with a 25% implied the call will sell for about 12.50 real world and the put near 17. Option markets are too efficient for any free lunch. 3% negative carry on $150 stock is $4.50. Looks good on paper until you put real ### to it - and the width of leap b/a spreads make it more challenging. It's just a bull call spread and you see the same thing in the bull call when you price the synthetic,
I am not to sure what is going on with all these letters.
IBM = $150
Dividend = 5% or $7.5 annually
1 Year 150 call =$10
1 Year 150 put = $10
You sell the call, buy the put (zero cost collar), buy the stock and voila you have a free ride on the 7.5 dividend.
But what I am saying to the OP is that, this will not happen in real life (with such a large dividend). You could do it on stocks that have a small dividend, but you might as well just invest in tbills
Your example is arbitragable.