Dividend mining

[oraclewizard77]

Could you do it the opposite way. Say a stock is at $ 15/sh before the dividend. After the dividend is paid, the stock falls to $ 14/sh. You buy the stock at $ 14/sh or lower when the stock nears the next the dividend payout as investors will bid up the stock to get the dividend.

Also, lets assume the company is not in the United States and you think that the $ is going to go back down in value compared to the country that the company is in,

So the strategy is to buy 100 shares of the stock, write 1 naked put, and then write 1 covered call. I am willing to own 200 shares of the stock if the put gets assigned.

Then let the stock get called away if the covered call price gets hit, if the put gets put to me, hold the stock till next dividend period.

 

[black diamond]

Actually the idea that the price should drop by the amount of the dividend is an oversimplification - there is a tax arb when different investors get different tax treatment.

If everybody had the same tax situation and the taxes on capital gains and dividends were the same, the price drop should equal to after-tax dividend and there is no arb. But since there are different tax situations for different investors there is no "correct" level of price drop - for any size drop somebody out there can get free money.

This used to be a bigger deal under old tax laws for dividends on stocks held by corporations. I think it is a pretty minor effect now but I am not sure, I haven't kept up with it.

 

[college_trad3r]

Who is "they"?

Don't you guys mean the market?

The price of a stock is determined by bid and ask.

So what happens at ex-dividend is that the bid and asks go lower, because the market participants know a dividend was coming.

You can profit with this especially in bull market.

You see dividends allow people to buy stock cheaper.

There have been cases where the stock was at it old level after a day, free dividend.

Ofcourse you need to take in account the black swans. If anybody could do this, anybody would be rich.

 

[GTS]

Quote from oraclewizard77:

Could you do it the opposite way. Say a stock is at $ 15/sh before the dividend. After the dividend is paid, the stock falls to $ 14/sh. You buy the stock at $ 14/sh or lower when the stock nears the next the dividend payout as investors will bid up the stock to get the dividend.

You seem to be suggesting that a particular price behavior of a stock right before it goes ex-dividend exists as a fact. If it indeed does then you have a huge edge right there that you could exploit without worrying about the dividend at all.

Also, lets assume the company is not in the United States and you think that the $ is going to go back down in value compared to the country that the company is in

Why complicate this? If you think the dollar is going to go down vs another countries currency then simply take an FX position and profit from it...no need to create Rube Goldberg positions if your edge is based on a currency move prediction.

 

[spindr0]

Now I'm gonna piss off everyone in this thread

You guys really need to read up on the mechanics of stocks going ex dividend as well as options.


To the King:

If you own the stock, you get the dividend. Capturing the dividend is very different from realizing the dividend as a gain (profit). If the stock does not rise after going ex-div, all you've achieved is being paid with your own money.

Writing a call just turns it into a covered call. You'll pay the taxman with any taxable event (ex div, options expiring, open positions being closed, etc.).


To rickf:

You will NEVER find a situation where the premium collected will "always" offset both the decline in the underlying and any commissions on the trade." If you could, everyone would be doing it and nothing else.


To oraclewizard77:

You can buy the stock anytime you want, before or after the dividend. You will only make money if the stock rises. Yes, to get the dividend, investors will bid up the stock as the ex-div date nears. But what happens if the market is dropping and your stock is going along for the ride or if your shares are being sold off? Do you think that this dividend buying strength will be enough to buoy the stock's price and prvent it from dropping?

As for buying 100 shares of the stock, writing 1 naked put, and then writing 1 covered call, just write 2 naked puts. Save some commissions and slippage (covered calls and naked puts are equivalent positions).


To black diamond:

Yes, different investors get different tax treatment because they have different tax brackets and tax rates are different on capital gains and dividends. But there is no tax arbitrage in buying a stock for its dividend. Arbitrage involves avoidance of exposure to risk. There's no arbitrage in buying a srtock for the dividend because the morning the stock goes ex div, the stock is subject to change in market price before you can sell it - it can go down. There is no free money.


To college trader:

Where to start?

At ex-dividend, the stock drops because that's the way that "they" defined it (the guys at the SEC, FED, etc. who control the picture and the volume) not because because the market participants knew a dividend was coming.

Profits are made in long stocks because they rise not because it's a bull market (some stocks go down in a bull market).

Yes, dividends allow people to buy stock cheaper but that doesn't mean that it's a good stock to buy.

Yes, there have been cases where the stock was at it old level after a day, resulting in a free dividend. But there are also cases where the stock dropped 5 or 10 points after a day so you end up with a small dividend which is your own money in the first place and a not so free $500 or $1000 loss.

And no, black swans don't have to be accounted for when buying a stock that has a dividend. All you have to do is buy the stock that doesn't go down.


Well, this has been fun!

 

[GTS]

Quote from spindr0:

At ex-dividend, the stock drops because that's the way that "they" defined it (the guys at the SEC, FED, etc. who control the picture and the volume)

I think this is turning into a semantic argument so let's take be clear:

The previous day's closing price, which is nothing more than an historical data point, is adjusted down by the dividend amt when a stock goes ex-dividend.

The price of a stock when its trading ex-dividend is determined by supply and demand, just like it always is. The guys at the SEC, FED, etc have nothing to do with it. It opens at the price that the market will support, regardless of what adjustments were made to the closing print.

Basically the argument seems to be does some entity force down a stock's price when it goes ex-dividend or does it drop because the market is efficient and buyers and sellers realize the stock is worth less ex-dividend? Obviously the answer is the latter.

 

[spindr0]

Quote from GTS:

The price of a stock when its trading ex-dividend is determined by supply and demand, just like it always is. The guys at the SEC, FED, etc have nothing to do with it. It opens at the price that the market will support, regardless of what adjustments were made to the closing print.

LOL. I think that I need to use more (g's) and 's when I'm making facetious tongue and cheek comments

 

[rickf]

Quote from spindr0:

To rickf:

You will NEVER find a situation where the premium collected will "always" offset both the decline in the underlying and any commissions on the trade." If you could, everyone would be doing it and nothing else.

[/B]

Sorry - I meant the dividend you collect should be more than the commissions associated with the trade so that even after those costs the dividend gives you an acceptable profit. Not the option premium.... I mis-spoke.

 

[spindr0]

Quote from rickf:

Sorry - I meant the dividend you collect should be more than the commissions associated with the trade so that even after those costs the dividend gives you an acceptable profit. Not the option premium.... I mis-spoke.

No need to apologize.

What you're missing is that when a stock goes ex-dividend, there's no profit. Suppose you own 100 shares of a $ 20 stock, the quarterly dividend is 50 cts and it goes ex-div Monday. At Friday's close, your position is worth $2,000. On Monday morning it goes ex div.

Assuming that there's no trading in the stock (yet), and your stock is now $19.50 and a 50 ct dividend with be forthcoming. Any way you cut it, you had $2,000 before the dividend and you have $2,000 after it (until subsequent trading drives the stock's price up or down). IOW, there's no profit from a dividend until the stock rises 50 cts, back to its original price, at which time you have a $20 stock again and the 50 ct dividend.

Turning this into an option position doesn't alter the above conditions. That's just a different strategy for your long stock,

 

[black diamond]

Quote from spindr0:


To black diamond:

Yes, different investors get different tax treatment because they have different tax brackets and tax rates are different on capital gains and dividends. But there is no tax arbitrage in buying a stock for its dividend. Arbitrage involves avoidance of exposure to risk. There's no arbitrage in buying a srtock for the dividend because the morning the stock goes ex div, the stock is subject to change in market price before you can sell it - it can go down. There is no free money.

You are getting hung up on semantics here. Replace the word arb with pseudo-arb if you want and see if you still object. I think you know that a "true" textbook arb is rare or non-existent, there almost always at least some execution risk. The word arb is commonly used loosely to mean a trade with an disproportionate expected return for the risk, and I am not going to write a disclaimer every time I use it! But maybe free money was a strong phrase, I'll give you that one.

That aside, the fact is if they price in a drop based on their tax status and your tax status is different there can be a very attractive trade.

The drop should be less than the value of the dividend in normal cases, or else there would be a tax advantage for long term investors to sell just before the dividend and buy back after. So for example, say the market prices an ex-dividend drop of 80% of the value of the dividend. If I pay no taxes on dividends, I can buy the stock just before it goes ex-div and sell right after, and keep 20% of the value of the dividend in expectation while being exposed to price risk for a very short time. I can short an index future to hedge some of the price risk. You are right that it is not no-risk but you would "normally" have to hold price risk much longer for that level of expected return.

Corporate investors used to have very low taxes on dividends, no taxes in some cases, and they put a lot of money into dividend capture strats until the tax laws changed in the 1980s. I'd be surprised if there not similar opportunities in at least some small niches out there now.