Options for Risk-Free Portfolios presents an advanced strategic approach using options to reduce market risks while augmenting dividend income, this title moves beyond the basics of stocks and options. It shows how the three major segments (stocks, dividends, and options) are drawn together into a single and effective strategy to maximize income while eliminating market risk.
The strategies proposed here are “conservative” in the sense that they enable one to set up positions to generate income on short-term open positions. These positions are not based on smart stock selection or even on conservative options strategies by themselves. Instead, the “risk-free portfolio” uses the underlying stock to open a low-cost or nocost option position designed specifically to generate a desirable end result (high return, low risk)—not from either stock or option profits but from dividends. The short-term open positions are designed to identify attractive dividend yields— monthly instead of quarterly. As a result, three stocks each yielding 4% per year are opened only long enough to earn a quarterly dividend. Since dividends are earned on a monthly basis, this results in an overall annual dividend yield of 12%.
The first five chapters methodically explore the features and risks of each component of the dividend collar strategy: dividends ( Chapter 1 ), options ( Chapter 2 ), the covered call ( Chapter 3 ), the insurance put ( Chapter 4 ), and the collar ( Chapter 5 ). The purpose of devoting time to a study of the risks underlying each component is to demonstrate two seemingly contradictory observations. First, all components of the strategy contain risks, which are, at times, quite severe or invisible. Second, when these same components are combined to create a risk-free portfolio, all market risks are eliminated. Most perceptions of risk are specific to a strategy or to a market. However, the proper construction of the dividend collar works to eliminate these common market risks. Amazingly, proper application of the strategy eliminates dividend, option, and stock risks altogether, while yielding double-digit annualized returns. This is a bold claim and that is why the case is built methodically and cautiously by first examining the attributes of the components, and then providing clear examples showing how these risks are managed and eliminated.
Once the basic strategy is mastered, it can be expanded further using the installment method, ratio writes and variable ratio writes, and synthetic stock positions. Though these expansions present greater levels of risk, some traders will find them attractive. As with all market strategies, every trader needs to balance the desire for return with acceptance of risk to some degree. This approach is the starting point for using stocks and options to generate exceptional returns and at the same time to manage market risk.
- The Dividend Portfolio, an Overview
- Managing and Reducing Risk with Options
- The Advantage of the Covered Call
- Downside Protection, the Insurance Put
- The Collar: Removing All of the Risk
- Rolling the Stock Positions: Turning 4% into 12%
- Examples of the Basic Strategy 165
- Modification: The Installment Collar Approach
- Expanding into the Ratio Write Dividend Collar
- More Expansion, Creating the Variable Ratio Write Dividend Collar
- Modifying the Strategy with Synthetic Stock Positions
Options for Risk-Free Portfolios: Profiting with Dividend Collar Strategies By Michael C. Thomsett pdf