Divi/Put combos on High Yield, Low Beta positions

What happens when we use the dividends from high yield stocks to pay for the cost of put protection?

 .... essentially turning an income stock into a capital appreciation play with limited or zero downside.

The Basics:

1. Buy the stock
2. Insure the position w/ put
3. Collect divis (to pay for put)
4. Optional - write covered call for additional income
5. Wait

What could happen?

• Stock Drops: Exercise put - no harm, no foul, no profit** (opportunity cost)
• Stock Stays Flat: no harm, no foul, no profit** (opportunity cost)
• Stock Goes Up: Put Expires - profit all upside through covered call strike if applicable
• Company stops paying dividends (you are now out the cost of the put)

Fishing Pool:

• Low beta stocks should have cheaper put premiums (lower volatility = lower insurance)
• High Yields (North of 10%)

Only one scenario here (stock rises) will create a profitable situation for the trader .... however, any and all other scenarios (assuming company pays dividends as anticipated) have zero downside and cost only opportunity. One could margin upon these positions into treasuries or low risk asset classes to make up for the opportunity cost.

**I spoke a little too soon - the example below shows a scenario where the anticipated dividends exceed the put premium .... this creates a guaranteed profit (unless company stops paying divis)

Part 2: Guaranteed positive return on NLY