Author Topic: Buying PUTS against a stock giving 1 time dividend  (Read 2529 times)

Mother Fussbudget

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Buying PUTS against a stock giving 1 time dividend
« on: September 25, 2016, 09:44:22 PM »
Okay option traders... have a look, and let me know what you think, please.

I've been experimenting with trading to capture dividends.  Google 'Dividend Capture Strategy' to get more info on how it's done.  Essentially, I buy a stock that's announced a dividend, and hold it overnight on the ex-dividend date.  The next morning, the price of the stock is generally reduced by the amount of the dividend, and over the next several days, the stock price tends to rise back to the price it was at before the dividend.  Even if I sell the stock the day after the dividend, if I'm holding it overnight when the ex-dividend date occurs, I'm entitled to receive the dividend.  I've been doing between 1 to 3 stocks per month to try to generate extra dividends in my IRA.

Here's my dilemma:
In researching stable stocks with good dividends to use for dividend capture (or for long-term holds), I came across a stock SYNT - Syntel Inc.  They have a one-time dividend of $15/share - a large amount for a $41 stock - ex-dividend date 10/4/2016 - payable on 10/3/2016.

Ex/Eff-Date    Amount   DeclarationDate   RecordDate   PaymentDate
10/4/2016        $15          9/10/2016    9/22/2016   10/3/2016

After reviewing SYNT's balance sheet, I'm not convinced they're a long-term hold - not a stock *I* want to buy long term.  In fact, I suspect I would be a SELL - I do NOT want to hold this stock.  For one thing, I know that on 10/3-or-10/4, the stock price should go down by $15/share once the ex-dividend date hits.  I'm not sure how long it will take this stock to recover $15/share... or even if the *can* recover that much in a reasonable time. 

BUT... how could I use that information to make a profit? 
The stock price should be down $15 on 10/3 or 10/4.  Currently the stock is at $41/share.  I could *short* the stock... but that puts too much capital at risk.  What if the stock doesn't go down as expected.  I could buy PUTS (or sell CALLS) on the stock - buy 100 PUT contracts of Oct-27 $40 PUTS @ $0.55 ($55 per contract)  Total invested:  $5,500  If the stock goes DOWN $15 as expected, I could SELL those PUTS for $15/contract - total return of $14.55/contract ($1,500-$55=$1,445)  Times 100 contracts...  $144,500 net.
[math:  each contract represents 100 shares - 1 contract at $0.55/contract costs $55.  100 contracts = 100 x $55, or $5,500.  Sell that 100 contracts for $15.00/contract; $15 x 100 shares = $1,500.  100 contracts = 100 x $1,500 or $150,000.  Minus $5,500 invested, nets $144,500]

Assumption:  I'm assuming holders of OPTION contracts are not eligible for the actual dividend since they're not holding actual shares, but holding the "right-to-buy/sell" shares.  Is this a correct assumption?

frugledoc

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Re: Buying PUTS against a stock giving 1 time dividend
« Reply #1 on: September 26, 2016, 07:47:15 AM »
This is gambling, not investing.  Would be a lot easier just do play online roulette.

mathjak107

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Re: Buying PUTS against a stock giving 1 time dividend
« Reply #2 on: September 26, 2016, 08:04:02 AM »
study's show trying to capture the dividend has about a coin toss chance of success  . in fact you may stand  a better chance just buying a non dividend payer and letting the same market action work on it .
« Last Edit: September 26, 2016, 08:06:46 AM by mathjak107 »

tyleriam

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Re: Buying PUTS against a stock giving 1 time dividend
« Reply #3 on: September 26, 2016, 01:32:24 PM »
My question is why do you assume the value of the stock is going to drop $15?  Historically it seems like their stock was valued at about $40 now they are receiving a one time payment of $1.24 billion and are immediately paying it out in the form of a $15 dividend.  Isn't that sort of a pass through?  Unless you are saying the $40ish price had the $1.24 billion priced into it.  That does not seem like the case however because when the $15 dividend was announced Sept 12th the value of the stock jumped from about $40-45 but is back to $40ish since then.  So maybe the bump from the dividend has already bumped and come back to normal.

The difference being that is the company had this $1.24 billion cash on their balance sheet then that would be a part of its valuation.  If they then paid it out in the form of a $15 dividend then yes the stock value would drop by $15.  This seems like a special scenario whereby they got surprise money and are immediately passing it through.

Shor

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Re: Buying PUTS against a stock giving 1 time dividend
« Reply #4 on: September 26, 2016, 02:02:52 PM »
Typically, because ex-dividend dates are known well before hand, what you will typically see is that the spread on the buy-sell for options diverges as you get close to the date. What's actually happening is that the formulas that know to trade around this are already pricing in the eventual drop, so the market cools a bit fully expecting the drop to occur.

The only way to work around this is to either, know before others, or buy in early. The risk with option 2 is of course that the price rises up while you're holding and your $15 drop doesn't drop nearly as big as you thought it would.

The only exception to this are the option traders that are working the market, you might be able to get some volume here that is not priced in line with the market. Usually anything further than ~40% off the expected price is bought off, although again that depends on the bots. The bigger that prices diverge from the expected range, in both volume and price, the more red flags go up and the formula will either trade in to it, or move out (ie it doesn't know what's causing this huge difference, so it moves off to the sidelines until clearer lines are established).

Can you take advantage of this? Ehhh yes maybe, but keep in mind that whoever is on the other side can have bigger pockets,
on top of that you might have trouble offloading that much option volume depending of course on the price and the underlying stock. There is a worst case where you can't offload your options and you either sell at a discount, or hold to execute (uhh in which case you better have the margin available to exercise those options, even temporarily)

Do you think it's a sure thing? I think you need to adjust your expectation until it's down to a reasonable expectation of this trade going either way (mind you, not 50-50, merely that either direction has some chance of occurring), and then you can fire it off if you still think it is a worthwhile risk, or if the odds are good in your favor.


Things to consider:
- Remember to set some very rigid guidelines on when to exit, especially if things don't turn out the way you thought it would.
- the dividend drop, both in price point and existing orders is adjusted automatically by the market. This is enforced so that come ex-dividend you don't suddenly have a load of orders that are mispriced. Therefor, do not make your order for the day right after and expect it all to work out, prices adjust. Make your order earlier and watch the market for either hitting your pullout point, or for the expected market event to occur.
- If things don't go your way, I would heavily advise you to not hold on waiting for something to bail you out. The trade is based on certain criteria, the dividend. It is perfectly okay to exit the position once those criteria are no longer the case (in this case, the dividend dropping the stock below a certain price point) and recover some of your investment
- The buy-sell of an option can also, on its own change in price based on the underlying sentiment, not Only on the underlying stock price. For instance, a lot of fear about earnings has a mild effect on Puts as people buy up puts for insurance form a drop. These prices, on their own fluctuate the value of the options, on top of the intrinsic and time value of the options.

mathjak107

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Re: Buying PUTS against a stock giving 1 time dividend
« Reply #5 on: September 26, 2016, 02:03:57 PM »
exchange computers are required to drop all bids by the pay out amount any time there is a dividend payout and that money leaves  the company .

that makes all market action take place on lower opening prices . if the stock goes up 3% that day it is 3% based on a lower figure


FINRA RULES  :

5330. Adjustment of Orders

(a) A member holding an open order from a customer or another broker-dealer shall, prior to executing or permitting the order to be executed, reduce, increase, or adjust the price and/or number of shares of such order by an amount equal to the dividend, payment, or distribution on the day that the security is quoted ex-dividend, ex-rights, ex-distribution, or ex-interest, except where a cash dividend or distribution is less than one cent ($0.01), as follows:
(1) Cash Dividends: Unless marked "Do Not Reduce," open order prices shall be first reduced by the dollar amount of the dividend, and the resulting price will then be rounded down to the next lower minimum quotation variation.
« Last Edit: September 26, 2016, 02:06:27 PM by mathjak107 »

Mother Fussbudget

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Re: Buying PUTS against a stock giving 1 time dividend
« Reply #6 on: September 26, 2016, 02:23:36 PM »
(1) Cash Dividends: Unless marked "Do Not Reduce," open order prices shall be first reduced by the dollar amount of the dividend, and the resulting price will then be rounded down to the next lower minimum quotation variation.

That is what makes this a feasible market trade.  It's interesting because it's publicly available information, but there's no word in the press of people doing this sort of trade.  Sometimes trade ideas like this turn out well, sometimes not, so I'm not investing too much in this.  As tyleriam says... the 'market' could see this as a pass-through transaction, and the stock price might not be affected at all.  But, it's more typical for a stock to go DOWN by the amount of the dividend: 
     If stockholder has $40 value in 1 share of XYZ stock pre-dividend.
     And a $15 cash dividend is given for each share. 
     Then ex-dividend, each share is worth $25 + $15 cash dividend - overall valuation remains unchanged.

Will update next week... on ex-dividend date.

beltim

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Re: Buying PUTS against a stock giving 1 time dividend
« Reply #7 on: September 26, 2016, 02:52:49 PM »

Shor

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Re: Buying PUTS against a stock giving 1 time dividend
« Reply #8 on: September 28, 2016, 12:31:30 PM »
Put strike prices are adjusted for special dividends.

http://www.cboeoptionshub.com/2013/01/02/understanding-special-dividends-by-alex-mendoza-2013-01-02-2-05/
Cool, totally learned something I did not know before! Thanks beltim!

NESailor

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Re: Buying PUTS against a stock giving 1 time dividend
« Reply #9 on: October 13, 2016, 06:58:44 PM »
(1) Cash Dividends: Unless marked "Do Not Reduce," open order prices shall be first reduced by the dollar amount of the dividend, and the resulting price will then be rounded down to the next lower minimum quotation variation.

That is what makes this a feasible market trade.  It's interesting because it's publicly available information, but there's no word in the press of people doing this sort of trade.  Sometimes trade ideas like this turn out well, sometimes not, so I'm not investing too much in this.  As tyleriam says... the 'market' could see this as a pass-through transaction, and the stock price might not be affected at all.  But, it's more typical for a stock to go DOWN by the amount of the dividend: 
     If stockholder has $40 value in 1 share of XYZ stock pre-dividend.
     And a $15 cash dividend is given for each share. 
     Then ex-dividend, each share is worth $25 + $15 cash dividend - overall valuation remains unchanged.

Will update next week... on ex-dividend date.

how about that update? ;)  did the strike get adjusted?

Mother Fussbudget

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Re: Buying PUTS against a stock giving 1 time dividend
« Reply #10 on: October 19, 2016, 03:26:31 PM »
Yes it did.  Adjusted down $15/contract.  It was a mostly a break-even proposition. :-(

Jack

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Re: Buying PUTS against a stock giving 1 time dividend
« Reply #11 on: October 19, 2016, 04:03:14 PM »
Yes it did.  Adjusted down $15/contract.  It was a mostly a break-even proposition. :-(

By "mostly" do you really mean it was a net loss including expenses?

Shor

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Re: Buying PUTS against a stock giving 1 time dividend
« Reply #12 on: October 19, 2016, 07:27:19 PM »
Yes it did.  Adjusted down $15/contract.  It was a mostly a break-even proposition. :-(

By "mostly" do you really mean it was a net loss including expenses?
But you learned something new! And I bet you won't forget this lesson, or hesitate to pass your firsthand experience on to others! :D