Could someone explain the drawbacks of this option collar strategy on PPL? It looks to me that there is minimum risk. I use Robinhood for my trades and pay no commissions/fees.
- Buy 100 shares for $2,587
- Buy a Jan 21, 2022 $25 put for $435
- Sell a Jan 21, 2022 $25 call for $360
If I understand this correctly, I can only lose $162, right?
- -$2,587 -$435 +$360 +$2,500
PPL pays a quarterly dividend of about $0.413 per share. If PPL is above $25 at expiration the put will expire worthless and the $25 call will exercised. Including 6 dividends, the profit will be:
- -$2,587 -$435 +$360 +(6 * $.413 * 100) +$2,500 = $85.80
Earning 2.3% per year doesn't look like much but it is better than what some CDs or banks offer. I understand the risk of dividends being cut, inflation and that the call owner can decide to purchase the shares before the expiration date (which is hard to do with Robinhood). Are there other risks with this strategy?