Selling vertical call spread before ex-dividend date

[systematictrader]

It's actually the maximum earning... since you have no upside potential and only downside risk.

Be careful with that strategy...

yes it is, keep in mind iam a buyer at that price any ways, thus the put is simply a 6% maximum (desired) if stock never makes it there,

Iam starting to pick more stable stocks and do more filtering and screening on which ones i pick as well as to make sure iam diversified enough accross various stocks

NOTE: this is more so investing not trading, strictly in pretax money is where i do it

 

[systematictrader]

Below is an example of a trade I was trying before. Observing prior price action of Devon Energy around Ex Dividend time (looking 4 days prior, to one day following), and looking for a downward move greater than the ExDividend value, implies that the best performance is to sell 4 days prior to ExDividend date, then cover/exit by Close the day following ExDividend date. Only once in the past 8 Ex dividends would this lose money. --- Issue is the history is not a good predictor of the next event. This shows a ThinkScript I wrote to make the evaluations then display the most profitable one. The purple shaded areas are the times positions would be in play.
View attachment 170456
As I mentioned earlier, success rates turned out to be less than desirable.
BTW: the notation [4,1] means begin 4 days prior to ex div date, and exit 1 day following ex div date. -- Grades for all cases are shown for wins in white.

sell what ? the stock? as in short it? i assume ur factoring in the fact u pay the dividend but the idea is ull make more since the model shows the stock drops more than the dividend value ur paying?

am i on the right track?

 

[Pekelo]

based on my observation of a lot of dividend stocks for a strategy i use in my IRA, its not uncommon for them to rise that amount in two weeks after dividend date,

I think BP actually recovered the div drop on the same day 2 dividends ago. Well, what if I buy the stock after div day? If it raises back to my spread, then I just let it go away?

 

[systematictrader]

I think BP actually recovered the div drop on the same day 2 dividends ago. Well, what if I buy the stock after div day? If it raises back to my spread, then I just let it go away?

and if it drops further?

 

[systematictrader]

It's actually the maximum earning... since you have no upside potential and only downside risk.

Be careful with that strategy...

@JackRab u got me lit up on something else

Run this one with me please because either iam missing something or i found a gold mine (unlikely)

on the VZ example above, what if we sell the put at 3.55 and buy the call at 3.45 both strike 47
thats a credit of 10 cents, but put that ASIDE for a moment

stock is right now at 48.28 which is 1.28 above call price,

assuming stock drops to 30 lets say then loss is 17 bucks
assuming stock goes to 60 lets say then gain is 13 bucks

so what if we can get another put on top of that thats deep enough in the money where the break even stock price is 48.28 which would cover any losses if we go downwards

wouldnt we make the 10 cents credit plus 1.28 since price is at 48.28 (call strike is 47) plus even more gains if stock rise sky high above the deep in the money put we bought?????

 

[stepandfetchit]

sell what ? the stock? as in short it? i assume ur factoring in the fact u pay the dividend but the idea is ull make more since the model shows the stock drops more than the dividend value ur paying?

am i on the right track?

Kinda.. The "theoretical opportunity" is that the price movement down exceeds the amount of the Dividend (for some securities), and if true, trade to exploit that slight excess move. In my case I purchased PUTs that were > 2 weeks out (to minimize theta burn for the max 5 days in the trade), if options were avail and liquid, else short the stock if not HTB. -- The problem, history (even for the specific stock) was not reliable for predicting the next occurrence outcome. -- Success rate was about 50%, so was an exercise in chasing my tail! -- The price bubbles in the chart should show price action for each case compensated for the amount of the Dividend.

 

[ironchef]

On thing to keep in mind is that low beta isn't the same thing as low volatility. Beta is essentially correlation to the broader market, a .5 beta stock would be expected to move .5% for every 1% move in the S&P 500, for example. Note that BP actually has a beta just over 1, so it's not really even low beta. However that only reflects systemic volatility, each stock has it's own idiosyncratic volatility that can be huge. A stock could randomly go up and down an average of 50% a day, but if it was completely uncorrelated with the S&P 500 it would have a beta of 0. GLD is an example of this, it's an ETF that tracks the price of gold and it has a beta of .07, but the price of gold is hardly a stable price.

Thank you for your post. So for example a stock with a beta of < 1.0 can have a volatility much greater than the market?

That explains this: The 30 day volatility of SPY ATM = 9% whereas the 30 day volatility of BRK.B ATM = 14% even though the beta of BRK.B is 0.8.

Another question: In CAPM, what is the risk used in the formula for expected return? I thought it was beta and not standard deviation? If that is the case, the according to CAPM, BRK.B should have a lower expected return than SPY?

Thanks.

 

[Sig]

Thank you for your post. So for example a stock with a beta of < 1.0 can have a volatility much greater than the market?

That explains this: The 30 day volatility of SPY ATM = 9% whereas the 30 day volatility of BRK.B ATM = 14% even though the beta of BRK.B is 0.8.

Another question: In CAPM, what is the risk used in the formula for expected return? I thought it was beta and not standard deviation? If that is the case, the according to CAPM, BRK.B should have a lower expected return than SPY?

Thanks.

Yes on the possibility for a low beta stock with higher volatility than the market. Pretty much anything related to gold seems to display that property, in my observations, i.e. higher idiosyncratic risk than systemic risk. CAPM uses standard deviation, I think it's called Security Market Line if you use the same formula with beta instead.

 

[systematictrader]

Kinda.. The "theoretical opportunity" is that the price movement down exceeds the amount of the Dividend (for some securities), and if true, trade to exploit that slight excess move. In my case I purchased PUTs that were > 2 weeks out (to minimize theta burn for the max 5 days in the trade), if options were avail and liquid, else short the stock if not HTB. -- The problem, history (even for the specific stock) was not reliable for predicting the next occurrence outcome. -- Success rate was about 50%, so was an exercise in chasing my tail! -- The price bubbles in the chart should show price action for each case compensated for the amount of the Dividend.

sell the put

 

[systematictrader]

Kinda.. The "theoretical opportunity" is that the price movement down exceeds the amount of the Dividend (for some securities), and if true, trade to exploit that slight excess move. In my case I purchased PUTs that were > 2 weeks out (to minimize theta burn for the max 5 days in the trade), if options were avail and liquid, else short the stock if not HTB. -- The problem, history (even for the specific stock) was not reliable for predicting the next occurrence outcome. -- Success rate was about 50%, so was an exercise in chasing my tail! -- The price bubbles in the chart should show price action for each case compensated for the amount of the Dividend.

this trade couples with the bottom trade, the mar option would need to be rolled on constantly till jan 2018