Locking a dividend

[aphexcoil]

What is the cheapest way of purchasing stock that offers a good dividend and then protecting yourself from any form of price movement?

Could you purchase the stock and then sell deep in the money LEAP calls?

 

[resinate]

I once wasted much of a weekend trying to figure this out. The problem comes from puts on dividend paying stocks being expensive enough that selling calls can't offset the difference and you lose the benefit of the dividend.

 

[FishSauce]

"The problem comes from puts on dividend paying stocks being expensive enough that selling calls can't offset the difference and you lose the benefit of the dividend."

Can you explain what you are talking about? What do you mean by "expensive"? Volatility are the driving force behind option pricing - in the long run, the valuation of calls and puts would be roughly be at fair value. I dont see how "expensive" put would affect the premium on calls??

how would you lose the benefit of the dividend using covered call??


A simple LEAP cover call would yield somewhere in the ballpark of 4-7% from premium alone. Assuming that you Dont get called, add 1-3% dividend yield and you come out looking pretty good (ignoring capital appreciation).

 

[resinate]

Quote from FishSauce:

"The problem comes from puts on dividend paying stocks being expensive enough that selling calls can't offset the difference and you lose the benefit of the dividend."

Can you explain what you are talking about? What do you mean by "expensive"? Volatility are the driving force behind option pricing - in the long run, the valuation of calls and puts would be roughly be a fair value. I dont see how "expensive" put would affect the premium on calls?? ...

{(added with edit)FishSuace, you do understand that Aphie wanted to protect his stock meaning the purchase of puts (I assume). The selling of calls alone adds a cushion against price decline but not protection against large down move. }

The problem is that dividends are also part of the pricing structure. This leads puts to cost more- you pay for the protection of your dividends. The cost of not holding the stock is higher as you do not benefit from the dividend which makes the calls cheaper. Try it out on some high yielding stocks. You will find your yield reduced to between 1-3% max no matter what the dividend of the stock.

 

[def]

Quote from aphexcoil:

What is the cheapest way of purchasing stock that offers a good dividend and then protecting yourself from any form of price movement?

Could you purchase the stock and then sell deep in the money LEAP calls?

+Stock, -Call = Short Put. You aren't locking anything in.

If you want complete protection, you'll have to purchase a put as well.

There are no free lunches unless you can recognize an arb and act extremely quickly before someone beats you to it. The option pricing will factor in dividends and exercise probabilities.