AAPL dividend capture

[QZW 6]

Does anyone do a dividend capture on AAPL? With ex-div date tomorrow, I bought AAPL shares and wrote corresponding DITM calls for Nov 16, with a premium of 0 to 1 cent only per share, not counting trading fees. Hope the shares will not be called overnight-at least not all of them. I sold 400 and 300 calls. There was a good volume on 400 calls-over 3400 calls today.

If anyone has experience trying to capture dividend or do dividend arbitrage, please share. I did AAPL  div capture last quarter with good results. 

QZW

Edited November 5, 2013 by QZW

[Gary 20]

I love the idea if it works consistently. In theory the price of AAPL should reflect the dividend on the ex date, so that a rational holder of the call would exercise it. Does AAPL not behave like that in practice?

[QZW 6]

I love the idea if it works consistently. In theory the price of AAPL should reflect the dividend on the ex date, so that a rational holder of the call would exercise it. Does AAPL not behave like that in practice?

Of course it does. 100% of the shares will be called away if the calls are at the same week as the ex-div date. With calls expiring 1 to 2 weeks after ex-div date, I had only about 25% of the shares called away last quarter. With calls 3 months away after ex-div date, I had no shares called, even with calls over $100 or 200 deep in the money. For me, the risk is small (only the trading fees plus whatever minimal premium I paid to exercise the buy/write trade), yet the potential profit is close to $3/share for holding the shares. Last year, when dividend started, the success rate was larger; everyone was afraid to hold the shares. May not be so this quarter, we'll see tomorrow.

I wish I had a better dividend capture strategy for SPY, it trades beautifully. It might be worthwhile to try dividend arbitrage on it. It requires a significant trading capital though to make appreciable profit. 

Edited November 6, 2013 by QZW

[Marco 223]

Look at the value of the put with the same strike as your DITM call. If it's higher than the div people won't exercise their calls (ignoring financing cost as we have rates at zero anyway)

The risk of the strategy is that the stock drops below the call strike. You are basically selling a far OOM put and getting the premium for that. Anything above that would be people 'forgetting' to exercise their calls. 95%+ of options will be in the hands of professionals they will exercise their calls. Not sure how many retail investors hold options that are a couple of 100 dollars ITM.

[QZW 6]

OK, all shares with calls expiring next week are called away this morning, none with calls deep ITM expiring Jan 2014 are called. Puts on those are worth only 10 to 70 cents at the moment. Now I have to unwind all shares and wait for the dividend to come in. Overall, this is still a profitable trade. Marco, you are right about AAPL handled/manipulated by professionals. It has always been this way, yet they "forgot" to exercise with some regularity when the stock was going down. Just an observation.

[Marco 223]

Every call that should be exercised after the 'model' (i.e. time value of the option and financing cost to buy the share is lower than the dividend) and isn't is a windfall profit for you. I'm somewhat sceptical that the market hands out free money at large though so I suspect the call you had were not exercisable after above formula which would mean you make your money on financing and selling puts (i.e. you could replicate you position by investing the cash at risk free rate and selling OOM puts).

 

What strike and maturity call did you sell? (that wasn't exercised)

Edited November 6, 2013 by Marco

[Marco 223]

just looking at the open interest (OI) of the Jan-14 400 Call (which for me is one people should exercise) on Yahoo finance vs. IB. On yahoo I think I still have the previous day OI and IB is probably updated (fist time I make the comparison so not 100% sure)

 

Yahoo shows 18,777 lots OI vs. 8,200 lots on IB that would mean only about 56% of the Calls have been exercised! So I'm way off with my 95% estimate. Maybe the Jan maturity is held by more retail investors who use LEAPS for leverage and just hold on to these DITM calls. I wanted to look at Dec-13 and Feb-14 in comparison to find proof for that theory but there was very little open interest in the DITM calls before div.on both maturities.

 

So looks like there is some money to be had. Thing its only about 2-2.5$/share before commissions and slippage (the spread on the DITM calls is pretty wide, how much did you have to pay to get in?) even if you can trade at mid and make 2.5$ that's only about 0.5% I'd still take that if its nearly risk free (bar the probability of AAPL dropping 25% in 2 days) and for being in the trade for 2 days. 

So do you unwind it after the div? (again how much does slippage eat into your profits on the way out) or do you hold until Jan (that the reward in terms of annualised yield is MUCH lower and the risk of a 25% drop MUCH bigger...)

[QZW 6]

Marco, you are right about slippage. I am not sure I follow about 56%. I do unwind the shares (already did some) and earn total $0.5-1.5/share this way including commissions, unless I wait till January, where I will earn full dividend. It's very unlikely that AAPL will drop below 400 until Jan expiration, but if it did, I would hold on to it then. We'll see. I bought shares/wrote January 400 calls. I do not annualize this dividend capture trade, as I do it quarterly and try to unwind as soon as I can for 1% profit. Haven't found a good formula for SPY, but I try to do it fairly often on a number of stocks. On less volatile stocks like KO, XOM, JNJ etc the best is just to do an ITM call before ex-div date aiming at 0.1-0.3% profit and 100% chance of getting called away without getting the dividend. Last year, I earned about 8% of my total portfolio by doing this regularly. An extra benefit, tax-wise, is that one can build up cost averages on these stocks.

Edited November 6, 2013 by QZW

[Marco 223]

the 56% was: open interest declined from 18,777 lots to 8,200 lots. So 10,577 lots or 56% of the original open interest of 18,777 lots have been exercised. Seems we agree on the possible return on this then.

Maybe not about the risk. I wouldn't call a 25% drop in AAPL over 2 months VERY unlikely - has happened more than once in the stock before. Certainly no risk that I would take for a 0.5% reward. So I would definitely look to unwind the position as soon as possible after the dividend.

[QZW 6]

I figured an interesting way of handling DITM calls on AAPL.  I bought 200 shares/wrote 2 calls @410 expiring Dec 6. In the buy/write feature, I am looking for a 5 cents/call credit, which offsets the trading fees. As AAPL declined, I rolled the 2 calls to 405 strike price while gaining $1,467.41 on the 410 calls, and "losing" $26 total (without fees) on the credit I got from rolling the calls from 410 to 405. So I actually got money from the trade that involves practically no risk at all... No chance AAPL would decline $145/share this week. Something to think about. Trying such a strategy on SPY is more of a challenge, but should be doable. Any opinions would be appreciated.

QZW

Edited December 2, 2013 by QZW

[indiana*josh 59]

I figured an interesting way of handling DITM calls on AAPL.  I bought 200 shares/wrote 2 calls @410 expiring Dec 6. In the buy/write feature, I am looking for a 5 cents/call credit, which offsets the trading fees. As AAPL declined, I rolled the 2 calls to 405 strike price while gaining $1,467.41 on the 410 calls, and "losing" $26 total (without fees) on the credit I got from rolling the calls from 410 to 405. So I actually got money from the trade that involves practically no risk at all... No chance AAPL would decline $145/share this week. Something to think about. Trying such a strategy on SPY is more of a challenge, but should be doable. Any opinions would be appreciated.

QZW

 

I'm confused.  When AAPL declined, you made money on the short calls, but didn't you also lose money on the shares themselves?

[QZW 6]

I'm confused.  When AAPL declined, you made money on the short calls, but didn't you also lose money on the shares themselves?

No, the shares will be called away at the fixed price anyway. When I rolled the call down from 410 to 405, I received a credit of $4.87. So the shares will be called at 405 instead of 410 while I gained on the 410 calls.

[Yowster 9,174]

I'm missing something here as well, by selling short-term DITM calls there is no premium to collect in the call options you are selling (the price of the call would basically be the difference between the AAPL stock price at the time of the trade and the strike price).   So, with your position, as the price of AAPL stock moves around your long stock and short calls should totally offset each other.  When your stock does get called away at expiration, I believe your position will be a gain/loss of zero (but you'll actually lose with the commissions and options assignment fees). 

 

The purpose of this initial thread was a way to try and capture the AAPL dividend without having to worry about losses due to stock price declines.  Since there is no ex-dividend date in play around the Dec 6 expiration, the only way you could make money on this trade is by having some premium/time value to sell in your calls - but by selling so DITM, I don't think you collected any premium in the price of the calls when you did your buy/write.

[QZW 6]

I'm missing something here as well, by selling short-term DITM calls there is no premium to collect in the call options you are selling (the price of the call would basically be the difference between the AAPL stock price at the time of the trade and the strike price).   So, with your position, as the price of AAPL stock moves around your long stock and short calls should totally offset each other.  When your stock does get called away at expiration, I believe your position will be a gain/loss of zero (but you'll actually lose with the commissions and options assignment fees). 

 

The purpose of this initial thread was a way to try and capture the AAPL dividend without having to worry about losses due to stock price declines.  Since there is no ex-dividend date in play around the Dec 6 expiration, the only way you could make money on this trade is by having some premium/time value to sell in your calls - but by selling so DITM, I don't think you collected any premium in the price of the calls when you did your buy/write.

It is a wrong topic, I know, just did not want to create another one. As far as rolling DITM calls, it helps quite a bit with accounting, as the called options are non-reportable and the cost average on the underlying share goes way up. But the trade is an elegant way of cashing on the DITM calls. I did not collect any premium with the buy/write, will not collect anything but loss on the shares and did lose on the fees, but I did gain a lot more on the call that I sold and then bought cheaper by rolling. 

Edited December 3, 2013 by QZW

[Yowster 9,174]

QZW - Let me throw out an example of what I'm referring to, and you can show me what I'm missing..

• Say you perform the buy/write with AAPL at 530 and selling the Dec 6 410 calls.  Assume one option contract for simplicity.  You'll spend $53,000 for the stock and collect about $12,000 for the covered 410 call, so your cost basis for the trade is $41,000.
• A few days later APPL drops to 515 and you roll the 410 covered calls to the 405 strike for a credit of $487 (your number).  Your cost basis is now $40,513 (41,000-487).  You've book a gain of approx $1500 on the 410 calls that you rolled, but that's just accounting at this point.
• Now we are at Dec 6 expiration day.  Making the assumption that AAPL share price is above $405, you'll collect $40,500 when the shares get called away. For any stock price above 405, that $40,500 closing number will be the same.
• So, when everything is closed you'll collect $40,500 but have a cost basis of $40,513 for a net loss of $13 (when you rolled the covered calls down from 410 to 405 you "lost" the $13 because you lowered your selling cost by $5 per share but only collected $4.87 per share to do so).  Net loss for the trade will be $13 plus what commissions and assignment costs you had to pay.

[QZW 6]

 

QZW - Let me throw out an example of what I'm referring to, and you can show me what I'm missing..

• Say you perform the buy/write with AAPL at 530 and selling the Dec 6 410 calls.  Assume one option contract for simplicity.  You'll spend $53,000 for the stock and collect about $12,000 for the covered 410 call, so your cost basis for the trade is $41,000.
• A few days later APPL drops to 515 and you roll the 410 covered calls to the 405 strike for a credit of $487 (your number).  Your cost basis is now $40,513 (41,000-487).  You've book a gain of approx $1500 on the 410 calls that you rolled, but that's just accounting at this point.
• Now we are at Dec 6 expiration day.  Making the assumption that AAPL share price is above $405, you'll collect $40,500 when the shares get called away. For any stock price above 405, that $40,500 closing number will be the same.
• So, when everything is closed you'll collect $40,500 but have a cost basis of $40,513 for a net loss of $13 (when you rolled the covered calls down from 410 to 405 you "lost" the $13 because you lowered your selling cost by $5 per share but only collected $4.87 per share to do so).  Net loss for the trade will be $13 plus what commissions and assignment costs you had to pay.

 

Your calculations are correct, except "just accounting" goes a long way, and in my book, is worth paying this $ for. I managed to mostly cover the trading fees on the buy/write by the credit, but not the trading fees on the shares to be called away, so it is extra $6.95+$6.95 for the roll. Overall, I paid about $40 for this entire exercise, but "freed up" $1400 in cash. A good analogue of this would be this example. Suppose you bought 100 shares for $101 each. Then the shareprice declined to $100 and you sold the shares at that price. Then you quickly rebought the same shares for $99. Now your cost average on the shares is higher, yet you "freed up" $100 for yourself, while still owning the same shares. The better way to earn money would have been to just sell the shares short at $101,but who's that genius who can do it without the risk? In my example, I "freed up" $1400 cash and paid $40 (net loss) for it. The caveat is that my risk was close to nil. The cost averaging up helps to reduce realized gains, and by the way, options that are called away are not reportable.

Edited December 3, 2013 by QZW

[indiana*josh 59]

 Suppose you bought 100 shares for $101 each. Then the shareprice declined to $100 and you sold the shares at that price. Then you quickly rebought the same shares for $99. Now your cost average on the shares is higher, yet you "freed up" $100 for yourself, while still owning the same shares. The better way to earn money would have been to just sell the shares short at $101,but who's that genius who can do it without the risk?

 

I don't get it.  In your example, you paid $10,100 for the shares, sold them for $10,000, and then bought them again for $9,900.  You are now holding shares worth $9,900 and $100 cash.  Since you started with $10,100, you have a $100 loss.  In what sense have you "freed up" anything?

[QZW 6]

I don't get it.  In your example, you paid $10,100 for the shares, sold them for $10,000, and then bought them again for $9,900.  You are now holding shares worth $9,900 and $100 cash.  Since you started with $10,100, you have a $100 loss.  In what sense have you "freed up" anything?

Yes, but you can wait and sell shares for $100 to break even, or $101 if you want to earn $100. Meanwhile, the $100 is credited to you and you can trade on it. Perhaps not the best example, because it does not reflect the call situation, but the idea is that this money is available for paying margin, etc.