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Section 2-Managing and Reducing Risk with Options

The market risk of owning stock is entirely eliminated when traders combine ownership of stock ( and dividend income) with protective puts and covered calls. The covered call creates premium income, and this income pays for the purchase of a long put.

Section 3 - The Collar: Removing All of the Risk

The collar has three parts: ownership of 100 shares, one short call, and one long put. This enables the trader to be stockholder or record before ex-date, so that the dividend will be earned. The strategy also assumes exercise is one of two forms. If the stock price rises, the short call is exercised and shares are called away. If the stock price falls, trader exercises the long put and disposes of shares. In either event, share are disposed of at the fixed strike. The purpose of this strategy is not to create capital gains on stock, but only to create compounded dividend returns.

Section 4 -Rolling the Stock Positions: Compounding the dividend yield.

In this strategy, traders have 12 dividends instead of four. This means that dividend yield is substantially greater per year than it is with a buy-and-hold strategy. As long as traders are stockholders of record before ex-date, they earn the dividend. By moving in and out of long stock positions 12 times per year, dividend yield is increased significantly.

Section 5 -Examples of the Strategy

Course will be based on a study of three separate companies. One will have dividend ex-dates in Jan, Apr, Jul, and Oct; the second d will ex-dates in Feb, May, Aug and Dec. The third will have ex-dates im Mar, Jun, Sept and Dec. By moving in and out of these issues with a collar so that the trader always 'hits' the ex-date, dividends are earned 12 times per year. In comparison, holding one stock yields dividend only four times per year. This strategy increases dividends as a result.

Section 6 -Modification: The Installment Collar Approach

The increase the potential of this strategy, traders may combine very short-term covered calls with relatively long-term puts. This installment collar is based on the idea of writing a series of short term covered calls to create exceptionally high premium income, while providing a permanent form of protection against stock-based market risk. This requires generation of adequate covered call income to offset the cost of the more expensive puts.

Section 7 -Expanding into the Ratio Write Collar

The strategy may involve combining the basic collar with a ratio write on the covered call side. This demands management of two separate issues. First is the timing of the collar to ensure the trader is stockholder of record before ex-date. Second is monitoring the short calls to avoid or defer exercise, while creating higher levels of premium income.

Section 8 -More Expansion, Creating the Variable Ratio Write Collar

Much of the market risk of the ratio write is eliminated and more easily managed with the variable ratio write. This involves the use of two separate strikes on the short call side. This enable the trader to have higher premium income, coupled with the ability to avoid exercise by closing higher-strike calls and creatng net income, while continuing to profit from the dividend yield each month.

Section 9 -Modifying the Strategy with Synthetic Stock Positions

This strategy can be made more complex with the addition of synthetic long stock (a long call and a short put) or synthetic short stock (a long put and a short call). The short call is coverd by ownership of 100 shares of stock, so that the trader continues to earn the dividend each month. The synthetic positions may offset the breakeven or lack of capital gains in the event of a substantial price movement in the stock: however, like the collar, the synthetic stock position coast little of nothing to open.