Delta indicates how much a change in stock price will be reflected in the change of the warrant price. The amount of put warrants required to compensate volatility of a stock to be purchased can be indicated as follows:. For example, in order to compensate 1 share of Apple with put warrants which have a Delta of -0,30 and a ratio of 0,1, the amount of warrants required is In order to compensate volatility, it is useful to choose a warrant deep in the money, and far in the future.

They have the highest delta or lowest, in case of put options where delta is negative. High delta means less warrants required. Expiry dates far in the future also mean higher delta, and less loss of time value over time. The formula also shows that in order to compensate the volatility of stock with call warrants, a negative number of warrants must be purchased, i. This compensation comes at a cost. No hedge is free. It must also be added that not every stock on the stock market has an easy to find and readily available call or put warrant available.

Dividend Capture Strategy Using Options -

Large cap stock has a higher probability for the availability of derivatives. In order to add some more numbers to the academic formula above, lets get a real life quote and watch it over time. Tomorrow this time we could verify again. Or, even better, we now look up how this has performed vs.

This means, this hedge would have been imperfect, even without transaction cost — however: It is difficult for me to verify the delta value which has been shown on the 1st of July. In order to compensate successfully, a higher number of warrants would have done the trick. The number of warrants would have been purchased if the delta on that day had been -0, This is all hypothesis and assumptions.

I shall continue posting tomorrow. A one day change is the relevant mechanism, so such a one-night study may hold a lot of insight. This means, the hedge is nothing but a loss, guaranteed.

This is an order of magnitude which may well be greater than any after tax dividend payout. Without further analysis, the intention of hedging a small stock price change with warrants can be discarded. The numbers show for example: Purchasing 31 Apple shares on To try to hedge that, I asssumed a purchase of put warrants. This should reflect the full invest based on ratio and delta. The warrants would cost 3.

One day later, the shares have risen. By consequence, the options have fallen. This is expected. However there are two issues: a as mentioned above, the hedge costs money due to the spread, b the hedge has overcompensated the gain of the base value. It has fallen more than the apple stock has risen. Components of the loss are the spread loss of options of about 1. I assume the Delta which is reported for the option is not a value with absolute truth in it, or I lack understanding for other implications which affect warrant price changes.

It may have to do with the lever. Small lever means higher invest in options and higher absolute loss on their spread. Even disregarding the spread loss, the hedging attempt was not reliable. Deviation of the hedge was:. The problem may be that the minimum increment for the change in value of warrants is 0. One cent already causes a large change in value due to the high number of warrants required. The minimum increment leads to very poor accuracy of such a hedging attempt. The case for Shell for example showed roughly double the change, the other possibility would have showed zero change.

With an option value so low in absolute price, the minimum change can already swing the picture altogether. Volkswagen: Change was cent.

What to Know About Dividend Dates and Dividend Capture Strategy

Actually, one of the options could have performed better: TR9T9Q. Minimum increment is slightly smaller than the deviation. Well, as a 1 cent increment would have brought this one close to perfection, it is plausible that the few minutes delay in recording were just those where the value switched.

Warrants with a high lever have a high impact of minimum increments, as the absolute price is low. Warrants with a low lever have a high impact of spread, as the required volume for the hedging attempt is high. The minimum increment may additionally impact effectivity. Dividend capture strategy cannot be hedged with put warrants. Unhedged, it is speculative, as the base volatility may outweigh dividends.

At the same time, you sell one deep-in-the-money call option against the shares. That is, for every one dollar move higher or lower in the stock, so, too, will the option move a dollar higher or lower. The importance of that last point will become clear in the example below. Best of luck! Published by Wyatt Investment Research at www. Related Articles. Andy Crowder. Mike Burnick.

Comments Cancel reply. Tim Plaehn has been writing financial, investment and trading articles and blogs since His work has appeared online at Seeking Alpha, Marketwatch. Plaehn has a bachelor's degree in mathematics from the U. Air Force Academy. At the center of everything we do is a strong commitment to independent research and sharing its profitable discoveries with investors.

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How to Use the Dividend Capture Strategy

Visit performance for information about the performance numbers displayed above. More Articles 1. Dividend Capture Considerations A corporation will issue a declaration of each dividend to be paid with the amount, a record date and a payment date. Long Only Dividend Pairs In stock trading, a long position comes from buying shares to hold in your account. Long Short Pairs Trading Strategy With a long-short pairs trade, one stock is purchased while the other is sold short. Selecting Stocks for Pairs Trading With the long-long pairs trade, the stocks should have share price histories that closely match each other, high dividend yields and -- optimally -- a month or so between ex-dividend dates each quarter.