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Dividend Capture Collar in Your SMSF Part 18 of Super Strategies

Part 18 of Super Strategies for Self-Managed Super Funds

We highlighted last week that the dividend season cycle is one of the more reliable market cycles and discussed the risks of chasing yield given the strong run the banks have had recently.

Today we show you how to hold on to your bank stocks for the upcoming dividends, while limiting your downside risk. The equities markets continue to trade higher, hitting six year highs this week. The Dividend Capture Covered Call Collar – is ideal for participating in future gains and picking up the dividend, while being protected on the downside.

Dividend Capture Covered Call Collar Strategy

The Dividend Capture Covered Call Collar, is an options trading strategy that investors can use to protect an existing position that has recently surged into a key resistance level and is about to pay a dividend. Rather than simply taking profits on the share position and potentially missing out on the dividend and future upside, the investor enters into a Dividend Capture Covered Call Collar. This options trading strategy seeks to protect your existing share position while still participating in some of the upside, including the dividend, for a modest outlay.

If you are of the opinion that a stock is likely to run into key resistance and the share has little chance of breaking that key resistance level, but you still want to hold on to it for the dividend, or because you do not want to realise capital gains, you could use a Dividend Capture Covered Call Collar options strategy. This strategy is similar to the protective put options strategy in that you also buy put options as protection. The difference is that you will now finance all or part the purchase of those put options with the proceeds from writing an equal number of out of the money call options.

The position will still protect you from losses below the strike price of the put options at minimal cost to yourself, but it will stop the position from profiting beyond the strike price of the short call options should the stock stage a rally and you could miss out on the dividend if this rally happens before the Ex-dividend date. That is you would miss out on a strong rally in exchange for putting on the protection of the put options for free (apart from commissions of course).

ANZ Bank Ex-Dividend Performance

ANZ has a tendency to sell-off between 12% to 17% after going Ex-dividend as seen in the chart below.

CHART 11: ANZ performance after paying dividend.

Recent Trade – ANZ Bank Dividend Protection

Here is a recent trade we recommended for holders of ANZ, in order to protect their downside and to collect the upcoming dividend. ANZ has had a spectacular run since bottoming in early February, around the $30.00 level and is now trading above its November highs.

The ANZ share price is now trading around $34.20 and has now been trading higher for the past eight weeks. If you wanted to hold on to your ANZ stock for the dividend, (ANZ goes Ex-div around $0.75 on 9th May), then you could take advantage of this Dividend Capture collar strategy.

This trade is intended to capture to the dividend and the share price which is expected to meet resistance in the near-term.

So with ANZ trading at $34.17, we you could buy protection at $33.50 by buying 3350 JUN14 Put for $0.82 and simultaneously write the 3501 JUN14 Calls for $0.24. This trade cost 58 cents but we are now protected until June expiry down below $33.50 and profits will be capped at $35.01 if the stock price trades above that level at June expiry. Note the 3501 Call option is an European option and there cannot be exercised until expiry.

CHART 12: ANZ Dividend Capture Covered Call Collar Trade

Note ANZ tends to oscillate around the 13 week moving average and the stock is now trading at the upper band of its trading range, as seen on the chart.

Assuming you picked up ANZ in the past twelve months around $30.00, either since the February bottom or mid last year for the November dividend, the payoff diagram for the Dividend Capture Covered Call Collar strategy is as follows:

CHART 13: The payoff diagram for the ANZ Dividend Capture Covered Call Collar Trade (assuming share cost of $30.00) and 3501 JUN14 Call/ 3350 JUN14 Put Collar

Trade Note

It is early days for this trade but ANZ trading is up 14% from its recent swing low and we are out laying 2% of the share price to have a protected position capped at $35.01. ANZ is trading at the all time highs again and only time will tell where the share price will end up at expiry, but we are protected until June expiry below $33.50, but profits will be capped at $35.01.

The Trade

Options can be used in order to reduce your risk while still participating in potential profits from a significant move by the underlying stock. We have explained the Dividend Capture Covered Call Collar strategy that can be used in your super fund, allowing you to participate is some of the future gains up to the sold strike price and the dividend (plus franking credits), while being protected by the put position.

In future articles we will talk about the High Yield Covered Call strategy and the Covered Call Stock Reversal strategy which may be particularly relevant to this market.

If you want to take advantage of the bank dividend season, then we have a number of strategies that can boost your yield and returns. Call 1300 610 024 or email advisory@d2mx.com.au .

Michael Hevern

Investment Adviser – D2MX Advisor