Pairs trading combined with dividend payment strategy

[superdoji]

Hi everyone,

I have a trading idea, what sounds logical, but I don't know surly if it is feasible in reality. The idea bases on pairs trading what will be combinated with holding stock on the ex-dividend day of a stock, and its aim to win the dividend payment with high probability.

The idea is the following. Buy a dividend paying stock (stock ABC) one day before the ex-dividend day, and go short at the same time in its pair stock (stock XYZ), which highly correlates with it, but doesn't pay dividend on that day. Exit both the long and the short position on the ex-dividend day of the dividend stock, and put the dividend payment in your pocket.

If your profit and loss on the long and the short position is nearly the same amount, because they were highly correlated, but they were in opposite direction, so their result is nearly zero. So it is a risk free pocket money from the dividend. You don't have to hit the right direction with the two position, the point is just that you enter and exit the long in stock ABC and the short in stock XYZ at the same time.

This strategy would of course assume, that you find the high correlating pair of the dividend paying (ABC) stock.

So, what do you think ? I would be curious of the opinion of pairs traders, whether they see the idea feasible, or not.

 

[BKR88]

Hi everyone,

I have a trading idea, what sounds logical, but I don't know surly if it is feasible in reality. The idea bases on pairs trading what will be combinated with holding stock on the ex-dividend day of a stock, and its aim to win the dividend payment with high probability.

The idea is the following. Buy a dividend paying stock (stock ABC) one day before the ex-dividend day, and go short at the same time in its pair stock (stock XYZ), which highly correlates with it, but doesn't pay dividend on that day. Exit both the long and the short position on the ex-dividend day of the dividend stock, and put the dividend payment in your pocket.

If your profit and loss on the long and the short position is nearly the same amount, because they were highly correlated, but they were in opposite direction, so their result is nearly zero. So it is a risk free pocket money from the dividend. You don't have to hit the right direction with the two position, the point is just that you enter and exit the long in stock ABC and the short in stock XYZ at the same time.

This strategy would of course assume, that you find the high correlating pair of the dividend paying (ABC) stock.

So, what do you think ? I would be curious of the opinion of pairs traders, whether they see the idea feasible, or not.

Are you aware the dividend comes out of the stock price?
ABC is trading at 50 and pays a $1 quarterly dividend.
Ex-dividend day the stock will be trading 49 and you’ll have $1 cash.
***Assuming a neutral market and no ABC news.
***Look at a chart of SGOV to see what happens on ex-dividend day.

 

[Real Money]

Dividends are almost irrelevant. Correlation trends, is speculative, and is also liquidity seeking. Margin and borrow rates, holding period, vols and liquidity are much more important. Also, baskets are employed in order to reduce idiosyncratic risk on the trade. A basket of stocks spread against a sector benchmark, or index, or another basket or commodity/index are common for trades like this.

 

[superdoji]

I think I understand what BKR88 means. But is there an ex-dividend day calendar for SGOV where I can see in advance when SGOV turns ? Or how can I know when is the next ex-dividend day decleared ?

 

[ph1l]

I think I understand what BKR88 means. But is there an ex-dividend day calendar for SGOV where I can see in advance when SGOV turns ? Or how can I know when is the next ex-dividend day decleared ?

Here are a few places to look for ex-dividend dates
https://www.dividendchannel.com/ex-dividend-calendar/
https://www.marketbeat.com/dividends/ex-dividend-date-list/
https://www.dividend.com/ex-dividend-dates-this-week/
https://www.nasdaq.com/market-activity/dividends
https://marketchameleon.com/Calendar/Dividend

Suppose stock ABC pays a 1% dividend on a particular date and highly-correlated stock XYZ does not. All other things equal, stock ABC will drop by 1%, but stock XYZ will not. So, I don't think the strategy will work.

 

[BKR88]

I think I understand what BKR88 means. But is there an ex-dividend day calendar for SGOV where I can see in advance when SGOV turns ? Or how can I know when is the next ex-dividend day decleared ?

My point is that it does you no good to hold through ex-dividend then sell. Your stock will drop the same amount as the dividend.

Hold SGOV through ex-dividend and receive the cash but then the stock drops or sell right before ex-dividend to avoid the stock drop but then miss the dividend.
Makes no difference except for tax purposes.

 

[schizo]

Hi everyone,

I have a trading idea, what sounds logical, but I don't know surly if it is feasible in reality. The idea bases on pairs trading what will be combinated with holding stock on the ex-dividend day of a stock, and its aim to win the dividend payment with high probability.

The idea is the following. Buy a dividend paying stock (stock ABC) one day before the ex-dividend day, and go short at the same time in its pair stock (stock XYZ), which highly correlates with it, but doesn't pay dividend on that day. Exit both the long and the short position on the ex-dividend day of the dividend stock, and put the dividend payment in your pocket.

If your profit and loss on the long and the short position is nearly the same amount, because they were highly correlated, but they were in opposite direction, so their result is nearly zero. So it is a risk free pocket money from the dividend. You don't have to hit the right direction with the two position, the point is just that you enter and exit the long in stock ABC and the short in stock XYZ at the same time.

This strategy would of course assume, that you find the high correlating pair of the dividend paying (ABC) stock.

So, what do you think ? I would be curious of the opinion of pairs traders, whether they see the idea feasible, or not.

LOL There's a name for that already: Dividend stripping. Look it up.

 

[AragornAaron]

The idea bases on pairs trading what will be combinated with holding stock on the ex-dividend day of a stock, and its aim to win the dividend payment with high probability.

I spent several months analyzing this strategy and related ones, utilizing resources like computer clusters, HFT databases, and even my own startup that is relevant to the subject. Unfortunately, I didn’t find any reliable dependency that could be profitably exploited in this manner.