Its a collar with a dividend stock.

You are unlikely to get better than saving account rate without some risk. Risk is relative, your maxium loss might only be a percent or two, but that's balanced against a guarenteed 4% or so profit in a savings account or CD.

Depening upon your tax rate it might be worth it since one can get qualified dividends which are taxed at a lower rate. I'm sure its all priced into the options.

mhesidence said:Its a collar with a dividend stock.

You are unlikely to get better than saving account rate without some risk. Risk is relative, your maxium loss might only be a percent or two, but that's balanced against a guarenteed 4% or so profit in a savings account or CD.

Depening upon your tax rate it might be worth it since one can get qualified dividends which are taxed at a lower rate. I'm sure its all priced into the options.

You are probably right...

As I said, I've already been doing this and have done extremely well. My first try at it I put about 40K into equities (about 15% of my overall AOR cash) and I'm outperformed the CDs ten fold. I can't expect this type of return in the future but I could certainly live with an average return of 6%.

sweetbutter said:Eh I found saving account to be much more liquid than CD. CD have too much time obligation and hence not AOR materials.
AOR is up again?

I agree - I'm at about 50% rewards checking/savings, 15% stocks and 35% in CDs.

There is something called Put-Call parity, which holds for for European options (exercise only at maturity). With the commonly traded American options, the parity does not hold, but it is a good approximation to reason about different portfolios of puts / calls / stock and cash.

The put-call parity for European options with no dividends states the following:

Call + Cash = Put + Stock, where

Call is 1 call option (not 1 contract), struck at some price K,
Cash is equal to strike price K, discounted by the risk free, rate, i.e., Cash = exp (-rT) * K. Cash represents investment in the term account for a period of T units,
Put is 1 put option, struck at the same price K,
Stock is 1 share of the stock.

This parity must always hold, or else there is an arbitrage. To convince yourself that the parity holds, simply check that in all possible states of the stock price at expiry, both sides are equal:

1. If S_final >= K:

- the Call is worth S_final - K. The cash has now grown to be exactly K, so the left side is equal to S_final,
- the Put is worthless, but the stock is worth S_final. So the right side is equal to S_final,
= right and left sides are equal.

2. If S_final < K:
- the Call is worthless, so the left side is worth K,
- the Put is worth K - S_final. Plus the one share, and you have the right side equal to K,
= right and left sides are equal.

I know that your strategy is a bit different, but assume for a moment that you follow this strategy instead:

- buy the stock,
- buy a put option struck at the current price,
- sell a call option struct at the current price.

In this case, you have basically invested in the term money market / CD account. Dividens don't make a difference, because the effect of known / declared / expected / anticipated dividends is priced into options.

If you sell a call that is struck at higher price than strike price of the put, you are simply taking a different type of risk. A little, but nevertheless some.

Like mhesidence said, your exact position is a collar, and your returns look like the picture in the collar link provided.

Like xerty said, you are paying commissions, spreads, etc. You can build more and more complex derivatives, but you might discover that the combined portfolio is in fact very similar to some simple security, and in the process you have paid a ton of commissions and spreads.

Edited typos, etc.

I don't really understand collars, so I'll just second the idea of buying stocks with an even smaller percentage of the a0r money.

For instance, if you had 10% invested in diversified stocks, even if the market did really, really bad, and lost 50%, then you'd be out 5% of your a0r money. Now sure, in a low interest rate environment, that would probably create a net loss on the a0r, but not a catastrophic one.

Unless you have the money on hand to pay back, in full, your AOR debt when due, buying stocks with AOR money is a horrible idea. If you cannot cover the debt from other sources you are basically locking yourself into selling your stock at a specific time. You have no idea of and no control over if the stock price will be up, down, or the same on that day.

High yield savings account probably the best "conservative" BT investment strategy;
something like GM Demand Notes or other short-term notes a "Moderate" strategy,
and investing on Prosper.com could be an "aggressive" strategy for someone who plans to repay at least some AOR money from other funds.

Stock investments have no place in the AOR game. They're a different game entirely.

mhesidence said:Kanosh said:
Stock investments have no place in the AOR game. They're a different game entirely.

Nah, as long as one uses a protective put its not a risky strategy. One will, at worst, know the exact max loss before the trade and should be able to pay that loss. Of course its not for newbies who've never done a stock or options trade.SEC Statistics: 90% of options trades lose money.

Kanosh said:mhesidence said:Kanosh said:
Stock investments have no place in the AOR game. They're a different game entirely.

Nah, as long as one uses a protective put its not a risky strategy. One will, at worst, know the exact max loss before the trade and should be able to pay that loss. Of course its not for newbies who've never done a stock or options trade.SEC Statistics: 90% of options trades lose money.

What does that statistic have to do with this strategy?

In a collar, buying put and selling a call pretty much cancel each other out cost wise. There is no "risk" to the capital if the protective put strike price is high enough.

Quick real life example Citibank C, current price $24.31

Buy 1 C DEC 2008 22.5 Put (.CXA) $2.46 $246.00
Sell -1 C DEC 2008 25 Call (.CLE) $2.68 ($268.00)
Buy 100 C DEC 2008 25 (C) $24.31 $2,431.00

$91 profit if C is >= $25/share
$159 loss if C is <= $22.5/share

Plus three dividend payments of $0.32/share or $32 * 3 = $96.

Max loss $63, max profit $187. Only a little over 3% APY on max profit, which not suprisingly, is about what money markets are getting (but you could get captial gains rates on the dividends). Not a good trade espeically when you add in commisions and when you can get a sure bet in a saving accout, but I'm sure searching and playing with strike prices one could find better.

mikeccall said:mhesidence said:Its a collar with a dividend stock.

You are unlikely to get better than saving account rate without some risk. Risk is relative, your maxium loss might only be a percent or two, but that's balanced against a guarenteed 4% or so profit in a savings account or CD.

Depening upon your tax rate it might be worth it since one can get qualified dividends which are taxed at a lower rate. I'm sure its all priced into the options.

You are probably right...

As I said, I've already been doing this and have done extremely well. My first try at it I put about 40K into equities (about 15% of my overall AOR cash) and I'm outperformed the CDs ten fold. I can't expect this type of return in the future but I could certainly live with an average return of 6%.

Preserved. If you are making those kind of returns you are doing something very wrong. As has been mentioned the whole concept of put-call parity is to eliminate any return great than the risk free rate for this strategy. If you really want to learn, please post either the past trades or current positions you hold. I would hate to see you lost 15% of your AOR portfolio, this sounds like a very risky strategy.