Selling vertical call spread before ex-dividend date

stepandfetchit said:
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.
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stock is at 48.55
 
systematictrader:
You may have missed my point. It does NOT work! There is no edge! It is a very slow "bleed" if done wisely! <-- At least this is what I found!
 
Sig said:
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.
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Appreciate your reply.

Regards,
 
@systematictrader ,

Verizon pays a quarterly dividend of about 58 cents each time. So total yearly dividend is about 2.30... Pricing/analyzing options 1 year out with multiple dividends isn't really easy... but basically:

The 47 put should be priced on current spot - dividends = about 46.20... So the 47 put in jan'18 is actually ITM.
The 47 call should be priced on current spot, and some distribution of chance of early exercise based on ALL dividends... so while it's ITM now... it might actually be better to not exercise at the next dividend date... and the following one... and the following one...
So, technically it is ITM, but it might be priced of a lower spot price, depending on several things... mainly the value of the same strike put and upcoming dividend(s).

So... that makes it a bit harder to analyze and definitely is not clear cut as you think it is.
 
To give an example, with the current spot... if all stays the same, at the next ex-div date the 47 call will not be exercised. That means the current pricing should be done with spot = 47.97... (48.55 min 0.58 div)....
But, then 3 months later... it's likely the call will not be exercised either, so the current pricing should be done with spot - 47.39... etc etc.....

If spot would stay the same, the call will probably be held until expiry... and is mainly priced on spot = 46.25 ish (total div = 4x .58 = 2.32).

So, that would mean the call via put call parity should be about 2.80
But, since there is a chance the stock goes up far enough for that call to be early exercised... and that extra chance (and extra gamma) adds about 65 cents.

That gives you a very rough idea how to look at this... but again, throwing in multiple dividends makes it a bit more difficult, since there are multiple points in time where it could be financially beneficial to exercise the call... giving 5(!) different expiry possibilities...
 
OK, so here is the improved version. I do the vertical spread on BP 1-2 days before the dividend. Then after the drop if the stock starts to climb up, once it reaches the strike where I sold the call leg, I sell cash secured puts on it. If it keeps climbing the puts cover the loss on the vertical, if it turns back, I make money on the vertical and possible on the puts too, or I take delivery.

This is only on stock I don't mind to own....
 
@Pekelo, but where is the edge to start the trade? you could basically do this anytime.. doesn't have to be pre-dividend...

And, are you quick enough to sell the puts? What if the stock moves up to fast? And if you sell the put (atm?)... you're short the straddle with a long OTM call... you're probably not fully covered for the up-move... put value < strike distance in vert spread? And if it keep dropping... what then... you own shitty stocks...

Hey, might be fine for you... but again, why do the trade initially?
 
JackRab said:
@systematictrader ,

Verizon pays a quarterly dividend of about 58 cents each time. So total yearly dividend is about 2.30... Pricing/analyzing options 1 year out with multiple dividends isn't really easy... but basically:

The 47 put should be priced on current spot - dividends = about 46.20... So the 47 put in jan'18 is actually ITM.
The 47 call should be priced on current spot, and some distribution of chance of early exercise based on ALL dividends... so while it's ITM now... it might actually be better to not exercise at the next dividend date... and the following one... and the following one...
So, technically it is ITM, but it might be priced of a lower spot price, depending on several things... mainly the value of the same strike put and upcoming dividend(s).

So... that makes it a bit harder to analyze and definitely is not clear cut as you think it is.
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The 47 put should be priced on current spot - dividends = about 46.20... So the 47 put in jan'18 is actually ITM.
bear with me a minute, why are we subtracting dividend from put price, were shorting the put here,

on the call side, were buying it, thus early exercise wouldn't be a risk on our end since we control that

tell me if we can or not, but if we ignore the dividend all together, we sell 47 put but 47 call with the premium we collected, there we are about 1.5 in the money on the call assuming stock doesnt move, now stock could move up or down, up we make money on top of the 1.5, below we need protection, which is provided by that put were buying for 2 months, if and only IF were able to keep rolling that 2 month put successfully for a year without paying time premium on them every two months, isnt that semi locked in profits? thank u for ur patience
 
JackRab said:
To give an example, with the current spot... if all stays the same, at the next ex-div date the 47 call will not be exercised. That means the current pricing should be done with spot = 47.97... (48.55 min 0.58 div)....
But, then 3 months later... it's likely the call will not be exercised either, so the current pricing should be done with spot - 47.39... etc etc.....

If spot would stay the same, the call will probably be held until expiry... and is mainly priced on spot = 46.25 ish (total div = 4x .58 = 2.32).

So, that would mean the call via put call parity should be about 2.80
But, since there is a chance the stock goes up far enough for that call to be early exercised... and that extra chance (and extra gamma) adds about 65 cents.

That gives you a very rough idea how to look at this... but again, throwing in multiple dividends makes it a bit more difficult, since there are multiple points in time where it could be financially beneficial to exercise the call... giving 5(!) different expiry possibilities...
More...


isnt the risk simply on the ability to keep rolling that second put (were buying for downside protection)
 
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