I just had a look at one example. I considered buying ~$200k worth of AMX (a very liquid Mexican stock with a 10% dividend withholding tax) at Wednesday's close of $17.81 in order to capture $0.16 in dividends the next day, but decided against it because the stock is just too volatile right now due to disappointing earnings. According to my closing option quotes from DeltaNeutral, the closing Ask on $22 November puts was $4.40. So I would have had to pay a $4.40 - ($22 - $17.81) = $0.21 premium for the price protection, which is far more than the value of the dividend. I could have placed an order for the puts at the $4.20 Bid and hoped to get it for free, but then it would be extremely doubtful that I'd get the quantity I needed (about 112 contracts).
Royal Dutch trades directly on US exchanges, but the Netherlands imposes a 15% withholding tax on its dividends, which is too high for the trade to be worthwhile (I'd be generating more foreign tax credits that I'd have to use before I could use my expiring foreign tax credit carryovers).
Hmm... Royal Dutch liquidity is pretty appalling on LSE... that's just ridiculous. On Euronext you wouldn't have to blink twice to clear 30.000 stocks and 300 options. Unilever stinks as well. Pretty much the entire LSE is shit regarding options... never thought it be that bad.
Uhm... AMX div is in April... so that's no good... EDIT.. ah, ex-date on 26th Oct.. .that was deleted from my system already Just for what it's worth, if the options trade liquid... you should be able to get the trade done at around the midpoint... especially in ITM puts just before ex-dividend, because usually investors are trying to sell the dividend before the ex-date so they don't have to pay tax. So there's usually pressure on this... people want to do reversals.
Uhm... not sure exactly, but wouldn't US ADR's be taxed locally on dividends? And how would you hedge, because if you would hedge with native options vs USD denominated ADRs you bear currency risk as well... so you'd get into all sorts of proxy hedging. And in my experience, ADRs aren't that liquid either... So how much is the tax-credit exactly? You were talking about doing 10k in dividend profits, so on the basis of 15% US company tax-rate... you have a 1.500 dollar credit? If you're looking at Mexican stocks with 10% withholding tax on dividends and add fees and costs etc.. is it really worth it?
The US depostiary, like any shareholder, only gets the net dividend (i.e., gross dividend minus withheld taxes) from the foreign company. It then passes on the net dividend (perhaps minus a small cut for themselves) converted to US dollars, along with 1099 information on the gross value and the amount of taxes that were withheld (both converted to US dollars), to the ADR holders, who can then use the 1099 information to claim the tax credits. So yes, ADR dividends are taxed on their gross value by the US as "foreign income". I wouldn't. Highly liquid ADRs and foreign ordinary shares almost always have their own options in the US. But options hedging doesn't look the slightest bit attractive for this purpose based on the brief look I've taken at it. My marginal federal tax rate will be 39.6% this year, so it will take about $10k in foreign income to use up my ~$4k in foreign tax credit carryovers that are expiring this year. Edit: I need to check with my CPA, but it could be that foreign tax credits can only be used at effective tax rates rather than marginal tax rates, in which case I'll need more than $10k in foreign income.
Executing a million dollars in trades in pursuit of a a few thousand dollars in tax savings does seem like overkill. But on the other hand, the extra trades will help my LLC keep its trading business tax status