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?
Thanks,