Dividend strat

misterkel said:
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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I think you don’t understand the trade. There is no premium as there is no optionality. Any premium you see is an allowance for funding.
 
newwurldmn said:
I think you don’t understand the trade. There is no premium as there is no optionality. Any premium you see is an allowance for funding.
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thanks for the reply.

Not sure what 'allowance for funding' means. But premium to me is price of single options (in this case just the call) above the intrinsic value. If Call is OTM - why would anyone exercise the calls? Just buy the stock.
If call is ITM, exercise only makes sense if the long calls cannot be sold for a greater amount than Stock-Strike, collecting a premium. If Option Price > Stock-Strike, then sell the option and buy the stock.


The statement - 'there is no optionality' is directly contradictory to the very notion of options. How can you have options without optionality?
 
misterkel said:
thanks for the reply.

Not sure what 'allowance for funding' means. But premium to me is price of single options (in this case just the call) above the intrinsic value. If Call is OTM - why would anyone exercise the calls? Just buy the stock.
If call is ITM, exercise only makes sense if the long calls cannot be sold for a greater amount than Stock-Strike, collecting a premium. If Option Price > Stock-Strike, then sell the option and buy the stock.


The statement - 'there is no optionality' is directly contradictory to the very notion of options. How can you have options without optionality?
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If the call is OTM, no one will exercise it. if the call is sufficiently ITM, someone will. you will see the premium changes based on the moneyness of the call.

The allowance for funding is that you have an opportunity cost if you buy this structure. Instead you can put that money in treasuries (or some other risk free rate product). The market will compensate you for this; you should take that out of the calculation for understanding your edge. If you are buying on margin then you will have to pay interest on that margin and that will explicitly come out of the edge.

The optionality comes from the asymmetric payout. A conversion (which is a basket containing a call and a short put) has no asymmetric payout - it's economics are almost exactly like that of stock except 1. you have locked in your funding rate, 2. you have locked in your borrow and dividend rates. neither of these risks have asymmetric payouts either.

I highly recommend you read the first few chapters of Hull's book or another mathematically oriented options pricing book. The math is simple, but the concepts are the basis for all investments.
 
newwurldmn said:
If the call is OTM, no one will exercise it. if the call is sufficiently ITM, someone will. you will see the premium changes based on the moneyness of the call.

The allowance for funding is that you have an opportunity cost if you buy this structure. Instead you can put that money in treasuries (or some other risk free rate product). The market will compensate you for this; you should take that out of the calculation for understanding your edge. If you are buying on margin then you will have to pay interest on that margin and that will explicitly come out of the edge.

The optionality comes from the asymmetric payout. A conversion (which is a basket containing a call and a short put) has no asymmetric payout - it's economics are almost exactly like that of stock except 1. you have locked in your funding rate, 2. you have locked in your borrow and dividend rates. neither of these risks have asymmetric payouts either.

I highly recommend you read the first few chapters of Hull's book or another mathematically oriented options pricing book. The math is simple, but the concepts are the basis for all investments.
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thanks - I'll check out the book. I assume you mean Options, Futures and other Derivatives?
 
newwurldmn said:
If the call is OTM, no one will exercise it. if the call is sufficiently ITM, someone will. you will see the premium changes based on the moneyness of the call.

The allowance for funding is that you have an opportunity cost if you buy this structure. Instead you can put that money in treasuries (or some other risk free rate product). The market will compensate you for this; you should take that out of the calculation for understanding your edge. If you are buying on margin then you will have to pay interest on that margin and that will explicitly come out of the edge.

The optionality comes from the asymmetric payout. A conversion (which is a basket containing a call and a short put) has no asymmetric payout - it's economics are almost exactly like that of stock except 1. you have locked in your funding rate, 2. you have locked in your borrow and dividend rates. neither of these risks have asymmetric payouts either.

I highly recommend you read the first few chapters of Hull's book or another mathematically oriented options pricing book. The math is simple, but the concepts are the basis for all investments.
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I can guarantee you everyone mildly competent knew what you meant, the problem is you use terms that no one else uses.
 
newwurldmn said:
How would you describe it without writing a paragraph given that it had been mentioned earlier in the thread.
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Opportunity cost would be more understandable, although I would agree that it doesn't fit the entirety of that paragraph, but then again neither does "chippy chip chip chop" which is the term I use to describe the same concept.
 
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