Dividend capture with deep ITM calls

Wow, a rare event. That must really add up to a good annual ROI on your portfolio.

 

Where is our buddy on yahoo that just buys the stock to collect the dividend because he says the stocks always go back up in a few days especially when they're reasonably valued healthy companies LOL. He says its right out of his hedge fund play book.

 

Nope, no one would ever get rich doing it b/c it doesn't happen often enough. It's more like a bonus from your company paid about once per year with just a bit of free gravy money. I like gravy.

 

Every dividend arb is done to the nth degree by mm's who transaction costs are fractions of what a retail trader would have to pay in order to get into the pool of short calls which might go unexercised.

I was kidding with that other post about the clown on yahoo but this is getting to be a joke to. Sorry but unfound dividend arbs on plain listed equity options don’t go unnoticed.

 

OP: under any case never sell the DITM call naked. Most likely you will get the stock short on ex day, and the dividend bill some days later.

Two questions:

1. OP: why don't post some of your dividend plays here and let others tell you what they think.
2. If people following OP's stragtegy exist, then the other party takes the money. The question then becomes: how does the other party do it? It is not just transaction cost, but the whole hedging that goes with it. So others: why don't say how the others (including MMs) take the money of people following OP's strategy?

 

Wasn't planning on writing naked calls.. this was a purely covered call play (buy/write).

But it won't work, as others politely pointed out. I was just checking out BXP, USB, and DOW, which all go ex tomorrow, and all day long the midpoint of the bid/ask on all the ITM calls was exactly at intrinsic.

For dividend plays I have played with FRO in the past but I have difficulty selecting an entry point.

 

this is an interesting question. A simple a long stock, short call postion is unlkely to have a long term postive return as the market is too efficient and prices the dividend into the call price. Perhaps you could compare a short aganst the box poston (long stock, short synthetc stock = long put plus short call) and if there were a difference then you might have a free play. On the other issue, for tax purposes, I beleve long stock and short DITM call does not receive preferential long term captal gans treatment. In additon, the recent tax laws requre the owner to hold the stock for a long period prior to the dividend for preferential tax treatment. Doing the strategy in a tax deferred account may be a way ....

 

Are you kidding!? Conversion/reversal is the most basic arb relationship of all, so the chance of any mispricing is...(hmm, let me think)...ZERO

 

It’s not just the conversion / reversal that are always in line. FRO is an interesting example since they have a large dividend and recently that was compounded by a special dividend where the strikes wee NOT adjusted to reflect it. You’ll notice on x div day and sometimes the day before the MM’s will do large numbers of call spreads with each other in strikes that are technically an exercise for the dividend and have a lot of open interest. The play there is simple: there are always a % of those call holders who are retail and fail to exercise their calls. The mm’s are trying, via the OCC lottery to hold the short side of those calls which don’t get exercised and thus be long stock vs. the short call to collect the dividend. The problem is that there is only a small number which don’t get exercised mistakenly and the volume in those strikes via the spreads traded by the mm’s is huge so the MM’s basically playing a lottery game.

 

MTE correctly notes that long stock & short synthetic stock is a basic arb play so the divdend will be priced in; and xflat notes that the concept can work --- if it's done in huge volumes of contracts. However by structuring the trade creatively, and taking on some extra risk, it may be possible to capture the dividend wth a modest number of contracts and avoid the arb play. Two possibilties> scenario one, the strikes of long put & short call can be separated. Example: xyz pays a dividend in April and trades at 62; we go long the stock, long the April 65 put, short the April 70 call; we take some extra risk; but if XYZ closes at 65 or less we could capture the dividend plus the short call, our cost being limited to the time value in the puts plus carrying costs of the whole position. The trader would have to calculate this carefully to see if worthwhile. scenario two would be long xyz, long a May 65 put, short April 70 call. Once we capture the dividend in April, we can close the postion or sell another call either May 70 or May 65 against our long stock, long put combination. Again some careful calculatons would have to be made of the expected future values of the calls and the carry cost, to decide whether it's worth doing...Again, we take some extra risk, but achieve possibly a greater reward....