Options strategy dividend capture
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In order to check the statement in real life, extensive statistical examination would be required. For a rough check, maybe some isolated examples of stock through the night before Ex-Dividend, compared to similar stock which does not have the same dividend date, could be insightful. Dividend payout is quarterly. The amount of the dividend was 0.
How did the stock perform during the night before Ex-Dividend date? This example shows no downward impact of Ex-Dividend date, any impact is likely superimposed by other greater factors. Yearly dividend, being larger, could be more likely to have visible impact. How did this stsock perform during the night before Ex-Dividend date? July 3 market was closed for July 4 holiday, 4 and 5 weekend Once again, no visible downward impact of Ex-Dividen date.
Several large upward jumps were observed around the time of dividend payout. It probably is a terrible example. Lets pick a period further in the past and a different player.
A Guide for Capturing Dividends by Using Covered Calls
Now here we have downward movement. Direct competitor General Motors went up during the same night. They had no dividend impact dividends pad in December and March. So this example in principle shows downward movement for a stock that has dividend payout and upward for a direct competitor.
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I believe the dividend impact in these few individual randomly picked cases was a minor part in what ever stock price change has occurred. General volatiliy of underlying stock is a significant risk factor for the Dividend Capture Strategy. One example would be the one put on investopedia, under the title of Dividend Arbitrage :. The example consists in purchasing stock and a put option at the same time. The put option makes sure the sales price is known in advance, eliminating volatility by executing the option.
Dividend Capture Strategy Using Options
Critics will be quick to point out that this is utterly unrealistic, in particular when the option is traded after the dividend is announced — the option will price in this change. So the theory is great, practice may not be so great. But apart from that, it is good to learn that a hedge could be made by purchasing the stock and a put option, and excercising the put.
Other than a real option, a warrant does not entitle you to buy or sell stock, but it grants you cash settlement by the rules stipulated in the warrant. The owner of a warrant receives the right, but not the obligation, to buy or sell a certain base value at a specified price, before the expiry date of the warrant.
Profiting from dividends with options | Option Samurai's Blog
Usually, this right is executed by payment, not by delivery. This means, upon execution of the right, there is no sale or purchase of actual shares, but the difference between the current stock price and the face value of the warrant is being paid.
You profit from the CC expiring or the stock rise and collect dividends along the way. If you're not Delta neutral you'll be left with a larger loss on the shares, or less of a gain on the option, and won't keep the full dividend. As he had already qualified for the dividend payout, the options trader decides to exit the position by selling the long stock and buying back the call options. How did the stock perform during the night before Ex-Dividend date? Overall, covered calls are best in a flat or a weakly rising or weakly falling market.
This differentiates a warrant from an option. Option vs. By executing a call warrant, the owner of the call will receive: Underlying share price — Strike price. If the call strike price is lower than the current share price, the owner receives money. If the call strike price is above the current share price, it makes no sense to execute the call.
By executing a put warrant, the owner of the put will receive: Strike price — underlying share price. If the put strike price is lower than the current share price, it makes not sense to execute the put.
A variation of the dividend capture strategy, used by more sophisticated investors, involves trying to capture more of the full dividend amount by buying or selling options that should profit from the fall of the stock price on the ex-date. Dividend Capture Strategy Using Options. Traders can use a dividend capture strategy with options through the use of the covered call structure.
If the put price is higher than the current share price, the owner receives the difference. A warrant costs money to buy, and it can be sold, similar to the underlying stock itself. The price of the warrant will change in line with the change of its underlying base value. The price of a call warrant is going to follow the price of the underlying stock. If the stock goes up, so goes the price of the call warrant.
The price of a put warrant is inverted to the price of the underlying stock. If the stock goes up, the put warrant goes down. Therefore, an investor cannot hedge volatility by buying stock and call warrants. However it is possible to hedge volatility by purchasing stock and its correlating put warrant in parallel. Delta indicates the correlation of warrant price and underlying stock price. Put warrants have a correlation between 0 and -1, call warrants have a correlation between 0 and 1. Delta indicates how much a change in stock price will be reflected in the change of the warrant price.
The amount of put warrants required to compensate volatility of a stock to be purchased can be indicated as follows:. For example, in order to compensate 1 share of Apple with put warrants which have a Delta of -0,30 and a ratio of 0,1, the amount of warrants required is In order to compensate volatility, it is useful to choose a warrant deep in the money, and far in the future.
They have the highest delta or lowest, in case of put options where delta is negative. High delta means less warrants required.
Expiry dates far in the future also mean higher delta, and less loss of time value over time. The formula also shows that in order to compensate the volatility of stock with call warrants, a negative number of warrants must be purchased, i. This compensation comes at a cost. No hedge is free. It must also be added that not every stock on the stock market has an easy to find and readily available call or put warrant available.
Large cap stock has a higher probability for the availability of derivatives. In order to add some more numbers to the academic formula above, lets get a real life quote and watch it over time. Tomorrow this time we could verify again. Or, even better, we now look up how this has performed vs. This means, this hedge would have been imperfect, even without transaction cost — however: It is difficult for me to verify the delta value which has been shown on the 1st of July. In order to compensate successfully, a higher number of warrants would have done the trick. The number of warrants would have been purchased if the delta on that day had been -0, This is all hypothesis and assumptions.
I shall continue posting tomorrow. A one day change is the relevant mechanism, so such a one-night study may hold a lot of insight. This means, the hedge is nothing but a loss, guaranteed.
This is an order of magnitude which may well be greater than any after tax dividend payout. Without further analysis, the intention of hedging a small stock price change with warrants can be discarded. The numbers show for example: Purchasing 31 Apple shares on To try to hedge that, I asssumed a purchase of put warrants. This should reflect the full invest based on ratio and delta. The warrants would cost 3. One day later, the shares have risen. By consequence, the options have fallen.
This is expected. However there are two issues: a as mentioned above, the hedge costs money due to the spread, b the hedge has overcompensated the gain of the base value. It has fallen more than the apple stock has risen. Thank you!
