Dividend capture with deep ITM calls

[xflat2186]

The puts have the dividend priced in so when the stock falls by the dividend amount after xdiv the puts will not go up in value. You're not really doing any dividend capture with those plays.

As I said dividend capture is really about trying to get into the pool of OI which inefficiently does not get exercised.

 

[drosengarden]

x-

You say that the puts have the dividend priced in? Then help me understand because I really want to get this:

Look at BCS. Closed at $24.30 on 8/19/08 on day BEFORE ex-div.

That same day - I could have Shorted the Sept 08 $20 Call ($3.90 Bid). Then I could have gone Long the Sept 08 $25 Put ($2.80 Ask). This would give me a premium of $1.10.

Assume I have the stock for the $24.30.
The dividend on this stock is $0.89.

To exercise the call at $20 would mean the exercisor is looking for a price to be at or above $23.90. Which it is - a gain of $0.40. As well they would pick up the $0.89 if exercised day before ex-div.

But on ex-div they lose that same dividend amount based on the adjustment. So is it worth it to exercise the option for the $0.40/share gain?

How many people/market makers would actually buy the call option at a premium of $4.30? instead of $3.90 on this same day? (Which makes it exactly equal to the stock value.)

Quote from xflat2186:

The puts have the dividend priced in so when the stock falls by the dividend amount after xdiv the puts will not go up in value. You're not really doing any dividend capture with those plays.

As I said dividend capture is really about trying to get into the pool of OI which inefficiently does not get exercised.

 

[drosengarden]

Can you give any examples?

It would seem even if you go deeper in the money on the calls that you would collect a bid premium that would make it worthwhile to the exercisor to actually exercise. Then you would be OUT money if you got exercised!

Quote from lowvoltrader:

MTE correctly notes that long stock & short synthetic stock is a basic arb play so the divdend will be priced in; and xflat notes that the concept can work --- if it's done in huge volumes of contracts. However by structuring the trade creatively, and taking on some extra risk, it may be possible to capture the dividend wth a modest number of contracts and avoid the arb play. Two possibilties> scenario one, the strikes of long put & short call can be separated. Example: xyz pays a dividend in April and trades at 62; we go long the stock, long the April 65 put, short the April 70 call; we take some extra risk; but if XYZ closes at 65 or less we could capture the dividend plus the short call, our cost being limited to the time value in the puts plus carrying costs of the whole position. The trader would have to calculate this carefully to see if worthwhile. scenario two would be long xyz, long a May 65 put, short April 70 call. Once we capture the dividend in April, we can close the postion or sell another call either May 70 or May 65 against our long stock, long put combination. Again some careful calculatons would have to be made of the expected future values of the calls and the carry cost, to decide whether it's worth doing...Again, we take some extra risk, but achieve possibly a greater reward....