Is it possible to use options to collect dividends on stocks while insulating yourself from the volatility? If so, how?
e.g., If I bought 100 shares of a REIT but didn't want to expose myself to fluctuations in the value brought about through interest rate changes or QE3 changes, could I buy an option to insure myself against sharp changes in value?
Something like this:
- buy 100 shares at $50 (worth $5000)
- buy a put option to sell 100 shares at $45 (worth e.g. $100)
Then if the stock drops to $25, and pays a 10% dividend I should have:
- 100 shares at $25 (worth $2500)
- 1 options contract ($2000 "in the money")
- $250 worth of dividends
For a net loss of $350
Similarly, if the stock stays the same value, I should have a net gain of $400 (dividends less the cost of the option expiring)
Or does the volatility cause the premium on the price of the options to be too high to make this worthwhile?