What I was thinking as a safe bet would be to sell vertical puts on dividend paying stocks since the put should reflect the value of the dividend and the vertical gives some protection against a market crash plus it allows me to purchase the dividend paying stock at price below market instead of closing the trade at a loss.
Selling verticals on dividend paying stocks
- Thread starter oraclewizard77
- Start date
- Status
If you are selling a vertical spread, won't the dividend premium basically wash out (since you both buy and sell an option), in which case it's just a regular spread?
No, if I sell a vertical put for example, sell the Dec 25 and buy the Dec 22.50, I collect a premium, but it is less than sell the Dec 25 naked. However, I would do this before the stock goes ex-dividend and before it posts a qtr report to only have to contend with market risk for example market crashing due to a plane or something.
Selling the vert put spread wont do anything for you on collecting a dividend since its priced into all the options.
In addition selling the vert put spread does not allow you to purchase stock below the market to avoid any loss. Since you sold the put spread you would be assigned on the short end of the put spread if infact the long end of the put spread became an exercise, you dont avoid the loss you would incur
Correct. As a general rule, it's a wash. Because of the pending dividend, you'll get a little more for the put sold and pay a little more for the put bot.
With near term options, despite common logic, sometimes you'll see the OTM strike go up more than the other, making the net spread difference a tad lower.
the main difference between selling puts and covered calls is that when it's dividend time, the covered call writer gets the dividend. I agree that the dividend doesn't help in the put selling situation. If you want to take advantage of the dividend, you'll need to be long the stock or short a call.
How does it not allow me to purchase the stock below the market price? Let's say for sake of argument, the stock is selling at $ 26/sh. I sell the $ 25 put and get $ 1.00 and then I buy the $ 22.50 put for $ .50.
1) If stock does not fall below $ 25/sh, I make $ .50 cents of profit
2) If stock falls down to $ 24.50, I basically break even.
3) If stock falls down to $ 22.50, basically I lose $ 3 but that is where my risk is capped vs selling the $ 25/sh naked and having unlimited risk.
Now lets assume the stock falls to $ 24/sh on day of expiration. I decide to kill my trade at a loss of $ .50 and close out the options. I now decide to buy the stock at $ 24/sh. I basically was able to buy the stock below the market price of $ 26/sh which was what it was selling for before I did this trade. I have no problem buying the stock since it pays a good dividend and will hold it for awhile. To now make back the $ .50 that I already lost, I can then sell a covered call. However, the reason for doing this trade is that the stock is a stable dividend paying stock where the fact that it is able to pay dividends will help keep it from tanking even in a bear market.
1) If stock does not fall below $ 25/sh, I make $ .50 cents of profit
2) If stock falls down to $ 24.50, I basically break even.
3) If stock falls down to $ 22.50, basically I lose $ 3 but that is where my risk is capped vs selling the $ 25/sh naked and having unlimited risk.
Now lets assume the stock falls to $ 24/sh on day of expiration. I decide to kill my trade at a loss of $ .50 and close out the options. I now decide to buy the stock at $ 24/sh. I basically was able to buy the stock below the market price of $ 26/sh which was what it was selling for before I did this trade. I have no problem buying the stock since it pays a good dividend and will hold it for awhile. To now make back the $ .50 that I already lost, I can then sell a covered call. However, the reason for doing this trade is that the stock is a stable dividend paying stock where the fact that it is able to pay dividends will help keep it from tanking even in a bear market.
- Status