Dividend strat

Sig said:
I think you'd find that the "arb" opportunity you see is actually the consensus for the probability that the dividend is downgraded in the time necessary to profit from the arb. So diversifying would just make it more likely you achieved exactly zero expected value profit.
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Most of it is financing related - something that retail traders underestimate.
 
newwurldmn said:
Most of it is financing related - something that retail traders underestimate.
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Financing as in the interest rate you'd get from the "arb" vice the risk free rate? Agree on that, some of the numbers posted earlier in the thread, although based on faulty underlying data, seemed pretty in-line with the risk adjusted rate for that transaction.
 
Thanks for the input.
I've been asking IB about a number of bad data points regarding dividends. I'm amazed at how bad it is - around 30-40% of their dividend dates are laughably wrong. Some even a list ex-div tomorrow incorrectly.

So, revised number is still acceptable. If dividend stays at .01, then you get annualized return of 4.1% which still beats risk-free rate - provided you can enter at the mid-point of 9.25. GE is very liquid, so it's possible.
 
Sig said:
Financing as in the interest rate you'd get from the "arb" vice the risk free rate? Agree on that, some of the numbers posted earlier in the thread, although based on faulty underlying data, seemed pretty in-line with the risk adjusted rate for that transaction.
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Yeah. The cost of holding the stock position (either by borrowing the funds or the opportunity cost of investing in a treasury).

It looks like an arb until you account for this cost of capital. Single stock Dividend trades are generally poor unless you know something - but if you know something you can exploit it better just trading the stock (like a dividend cut and corresponding stock sell off)
 
JNJ? - okay.

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If you can buy it for 140.40, you get a return of 4.6% - using 4 weeks out X 13 periods to annualize.
The plays look better inside two weeks.
 
Sig said:
I think you'd find that the "arb" opportunity you see is actually the consensus for the probability that the dividend is downgraded in the time necessary to profit from the arb. So diversifying would just make it more likely you achieved exactly zero expected value profit.
More...

How would you verify this?
 
nooby_mcnoob said:
Ned the pros to weigh in here.
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So you pay 40 cents to hopefully get an 90 cent div.

Two risks, you get exercised before the div: you lose the 40 cents.
You get the div and make 50 cents.

In either scenario you have to fund the 140 dollars for 1 month : 1M libor is 2.3% which is approx. 20bps of cost over the month. This is 26 cents for every 140 dollars you have to finance or lose in opportunity cost.

So you can make 24 cents or lose 66 cents.

You can only do the trade during the dividend period (4x/year).
 
newwurldmn said:
So you pay 40 cents to hopefully get an 90 cent div.

Two risks, you get exercised before the div: you lose the 40 cents.
You get the div and make 50 cents.

In either scenario you have to fund the 140 dollars for 1 month : 1M libor is 2.3% which is approx. 20bps of cost over the month. This is 26 cents for every 140 dollars you have to finance or lose in opportunity cost.

So you can make 24 cents or lose 66 cents.

You can only do the trade during the dividend period (4x/year).
More...

Yeah - I wouldn't do JNJ - somebody asked about it.

Question: Why would the long exercise? If there is any prem. left, then it would make more sense to sell the option and buy the stock.

1 month out doesn't work. Under 2 weeks, there are some trades that look good - 20% annualized. Divs have been announced by that time, so are definite, opportunity costs are much shorter.

1 concern is getting the short synthetic too close the ex-div date - no premium left. Too far out and you have to wait for the trade to close.
 
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