Is there a way to leverage DIVIDENDS?

Discussion in 'Economics' started by crgarcia, Jul 8, 2009.

  1. Even if you get deleveraged in price movements?
     
  2. You could buy a stock on margin and either buy puts or sell calls to hedge your directional exposure. However, the problem with this strategy is that the dividend yield must be high enough to cover the costs (margin interest for example).
     
  3. Interesting.
    Thank you.

    Maybe, now that margin interest rates are somewhat low, selling a call (covered call) may offset margin interest?
     
  4. Dividend swaps come to mind...
     
  5. Please realize that Interest, carrying costs, and dividends are all factored into the basic Black Sholes valuations that are in the pricing models.

    Just FYI...

    Don
     
  6. If you believe in efficient arbitrage pricing of options (B-S model), this method wouldn't really be leveraging dividends, since the receipt of dividends is priced into the model.
     
  7. Let's see:

    DIA dividend yield 3.34% (2.34 after deducting 30% dividend tax), ugh! we start with measly dividends.

    IB interest is about 2%

    We get $6.25 for the March $82 Call

    Maybe it's better with a better dividend paying stock?
     
  8. I'm not really following.

    If you own a call on a stock or index, you don't actually receive a dividend or any dividend yield.

    If the stock is to pay a dividend at t = 1, the option value should theoretically incorporate this expected fact and be valued as if the stock magically dropped in value by the amount of the dividend at t =1.

    I suppose if we are talking about unexpected dividends, then buying options could help leverage these.
     
  9. I meant buying another share on margin, and selling a call on it (covered call).
     
  10. What does happen, is if you are lucky, you can have a covered write, deep in the money, with dividend date near expiration date....and pray like Hell that you don't get exercised early on your short calls. This still works, maybe with 80% being exercised... not a great way to make money, but possible.

    Don
     
    #10     Jul 9, 2009