All About Dividend Collars

Dividends are a great tool for investors for a number of reasons. Traditionally, dividends have provided a source of reliable income for long-term investors. A so-called “widow’s portfolio” relied on dividends to continue to generate income for people who couldn’t work any longer. With time, however, the stock market has changed. Fewer companies even issue dividends when compared to generations past.

The sophistication of investors has also developed over the years. Investors have started to approach dividends in other ways. One common move in the stock market for savvy investors is the dividend capture strategy. Another is the dividend collar strategy. Each of these strategies helps investors capture the dividends paid out by a company. The dividend collar uses options.

It’s called a “collar” because it surrounds the ex-dividend date with long put and short call options. A range of dates is picked. Some of the dates when options would be exercised come before the ex-dividend date. Others come after it. The dividend collar is a good strategy for investors to use when a stock goes up a great deal over a short period of time.

Often, stock prices can surge and then face a downturn. A downward trend in stock prices is not uncommon after a dividend is paid out. Some stockholders may see a need to get out of a stock soon, in anticipation of such losses. But they will still want to find a way to capture the dividend before doing so. In order for the dividend collar to work, it’s important that the expiry of the options must be set beyond the ex-dividend date. The collar must surround the ex-dividend date.

Using a dividend collar is a protective measure. A good way to think of the dividend collar is as a method to ensure an investment. Buying options to protect the dividend does require an additional outlay of money. The protective collar should only be used when the dividend earned will be more than the cost of the options. In general, the dividend collar is a great choice for a stock that the investor already owns. A dividend capture is a similar move, but it’s most often used to purchase a stock just the day before the dividend drops.

Originally posted on RagingBull.info.