Monday, December 28, 2009

AGG dividend capture close out --ugly

AGG goes ex-dividend tomorrow, with an estimated payout of about $0.32.   I was still holding onto my AGG position from my attempted dividend capture at the beginning of December until today.   I was hoping for a little pre-dividend run up today, but macro forces related to interest rates were stomping about, and AGG ended up off .56 to close at 103.31.  I sold with about 10 minutes to go in the regular session at 103.27.  My break even, including the dividend from the 1-Dec distribution was 105.17, so my net loss was 1.90 per share.

This result points out the dangers of a straight up, unhedged dividend capture scheme.   The potential gains from collecting the dividend can be rapidly wiped out by forces acting on the underlying security--even on something as staid as an intermediate term bond fund.

  The only strategy I have found that seems to work consistently, not requiring holding onto the security for an inordinate amount of time,  is to sell deep in the money calls that expire relatively quickly after the ex-dividend date. The calls should be sold with enough premium to make the trade worth-while, even if the calls are exercised before the ex-dividend date (which is usually the case).     Since most ETFs with monthly dividends go ex-dividend early in the month, this leaves an uncomfortable ~3 weeks of exposure to the market if the options are not exercised.                                

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