![]() The $0.50 dividend – a fixed and unchanging benefit to the investor.On the ex-dividend date of the $0.50 dividend, the investor has three factors that will influence his or her profitability: Once the investor has found an attractive option to complement the $50 stock, it’s time to put the strategy into motion. Investors looking for high-delta puts should start by looking at short-dated put options, which have less time remaining and low enough volatility that a dividend-related price decline is a consideration. If the put option sells for $2 then the time value is $0.40 ( $2 – $1.60 = $0.40 ). If the stock is trading at $48.40 and the put option’s strike price is $50 then the intrinsic value is $1.60 ( $50 – $48.40 = $1.60 ). The time value of the option is the option’s value in excess of the difference between the stock price and the option’s strike price. In practice, this means an option that has little time value versus its intrinsic value. Thus, a put with a high delta is one where its value is only significantly influenced by the fall in price of the stock. For instance, if a stock’s put has a delta of -0.7 then that means a $1 increase in stock price will decrease put value by $0.70. A key point is this last part of the strategy – an option with a high delta.ĭelta is the ratio of the change in the price of an asset to the change in the price of the derivative. In order to hedge against this risk and still capture the dividend, you buy a put option where the delta would be high on the day the stock price drops. The dividend income you receive is small consolation for a stock in a strong downtrend.Investors trying to pursue a dividend-capture strategy need to protect themselves against the risk of the stock price falling on the ex-dividend date. But, I suspect, the strategy underperforms relative to long term investing during those same bull markets and uptrends since you're most likely going to sell the shares as soon as possible and therefore miss out on those upside moves, some of which will dwarf the dividend you were originally attracted to.Īnd you're definitely going to get hurt employing the strategy during bear markets. It may work in bull markets or uptrends in that you have a better chance of getting your dividend without facing any capital losses. Just because a company pays dividends doesn't mean that it will trade in a range and allow you to collect more than your share of dividends and recoup all the attendant downward price fluctuations at the same time. Sometimes that actually happens the same day, sometimes it takes a few days, and sometimes it takes a few weeks.Īnd sometimes it may takes months, years, or may, in fact, never happen at all. Obviously, stocks that pay dividends don't always trade down to the exact amount of their dividend (and stay down) following their ex-dividend dates.Ĭonsequently, those who employ this strategy often elect to hold onto the shares long enough for the stock to "bounce back" before selling. Of course, there are a lot of other factors determining share price besides ex-dividend dates. ![]() ![]() ![]() ![]() So yes, you qualify for the dividend, but now when you try to sell the stock, the share price is down by the same amount. As a result, with all else being equal, a company's share price will open on the ex-dividend date lower by the amount of the dividend. The most pressing obstacle is that the market is fully aware of the dividend calendar as well. Unfortunately, there are some serious drawbacks to implementing this strategy. But with this strategy, if you were nimble enough, you could conceivably qualify for a new dividend every day. If you own stocks that pay dividends for the long haul, you typically receive distributions just four times a year. For additional information related to the Dividend Calendar, see the related Dividend Dates page. ![]()
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