Options & Dividend to create a low risk trade....

H

H2O

I was looking for some more info on option strategies when I came upon this one. Could be interesting for a longer term investment.

In this times of low volatility, prices for options are relative low. If we can find a stock with a high dividend, would it be possible to create this strategie ?

Long stock, short put (leap) on a high dividend yield stock. If the dividend pays for the put, we have a low risk trade with unlimited up potential.

Example :

Long stock at 44.00
Put jan 2005 45 at 3.20
Dividend 2.20

Any thoughts ?
 
oops, we have a problem, we don't have enough money to pay the high dividend anymore from this year on ....
oops, i have a problem with my option position ....
 
Quote from cvds16:

oops, we have a problem, we don't have enough money to pay the high dividend anymore from this year on ....
oops, i have a problem with my option position ....
More...

In that case, you still would have a trade with an unlimited up potential within the time frame of the put option.
 
hmmm, your long the stock, short the put, the fact of suddenly not paying the dividend will surely make the stock tank, so you lose on both sides and you dont get the dividend you were expecting .... looks rather painful to me.
 
Quote from cvds16:

hmmm, your long the stock, short the put, the fact of suddenly not paying the dividend will surely make the stock tank, so you lose on both sides and you dont get the dividend you were expecting .... looks rather painful to me.
More...

No,

I would be long the stock and LONG the put. I expect the dividends to offset the costs of my put, but if there's no dividend, I still have an insured stock position.

Edit.... I just saw I typed short put in my first message, this should be LONG put.:)
 
ok, things are starting to get a bit more complicated now.
first i have to remark that the dividend will be priced into the puts, so i guess you play the game that it will fully recover the dividiend. This might work but ...
try the scenario were they suddenly stop paying dividends, the stock loses value probably and the put will not gain as much because the dividends will now be left out of the valuation of the put.
overall imo this dividend play is rather tricky and looks too much like easy money in a bull market, in other markets its probably a losers game.
 
Quote from cvds16:

ok, things are starting to get a bit more complicated now.
first i have to remark that the dividend will be priced into the puts, so i guess you play the game that it will fully recover the dividiend. This might work but ...
try the scenario were they suddenly stop paying dividends, the stock loses value probably and the put will not gain as much because the dividends will now be left out of the valuation of the put.
overall imo this dividend play is rather tricky and looks too much like easy money in a bull market, in other markets its probably a losers game.
More...

This would be the right time for this strategy.
1. Volatility is low so option prices are low.
2. We are in a bull market so put options are even more at a discount.

I've found some stock of which I could buy a 1year put (jan05) for the same price or only a few cents more than last paid dividend. (And these are stocks with high dividend growth)

If I take this position, worst case would be :
- No dividend payout this year.
- stock will not rise > price of the put within 1 year (Or else I can close the stock position and keep the put as a free shot)

What's the clue ?
 
Quote from cvds16:

you have a point, but you might as well just buy the calls then, it should be just the same.
More...

Call options don't receive dividend (as far as I know dividend goes to the holder of the stock), You would have to exercise your right before the dividend date.
 
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