Early Christmas present from IEF--or give and take?

I have not so patiently waited to close out my IEF dividend capture position.  I am still short IEF 91 Nov Calls and long IEF.  The calls have been showing IVs that have moved from really high to outrageously high.   They have been marked as being adjusted, and today I found out why--IEF declared a long term capital distribution of 0.51 for shares owned before the 2nd of November.  This was certainly not a routine distribution, unprecedented in at least the last 5 years.   As near as I can tell this surprise distribution will be extracted ($50.90 per call) from the short call holders who held the short positions before the distribution if the options are called.

With this information the premium price for the calls makes sense. Since I own the underlying this doesn't hurt me--I've already collected the distribution, but it seems like it could be unfair to traders with net short positions on call options.

If my interpretation of this modified contract is correct, ITM options will carry a .51 premium at expiration in addition to their intrinsic value.

AGG dividend capture -- in on Thursday, out on Friday

Thursday: AGG goes ex-dividend next Monday, the 2nd, last month's payout was .34 per share.   Bought AGG at 104.45.

Friday: With equities sagging this morning the bond funds are trending up.  I put in a limit order of 104.79, and it filled a couple of hours after market open.  If I wait for the dividend there will be an inevitable wait for AGG to recover back to my starting point.   I don't care how I get my .34 per share--the faster the better.

Historic Volatility for ETF and ETNs

I recently created a Buy-Write position in IEF as a dividend capture/ early option premium capture strategy.  One of the things I am interested in is the behavior of the  implied volatility of the 90 Nov call option relative to its historic volatility.  The CBOE has a nice feature that gives the volatility for stocks but it doesn't cover ETFs (like IEF, AGG) or ETNs (like VXX).   The Option Trading Tips website offers a free spreadsheet that does a great job of providing this historic volatility for any symbol you select.   You fill in the ticker and the time period you want and it accesses the Yahoo site to get the data.

This is the YTD result for IEF  (click to enlarge)

For IEF the historic volatility for the last 50 days (one of the spreadsheet settings) is 8.28%, which maps closely to the current  (27-Oct) implied volatility of IEF of the 90 Nov calls, which is 8.7%.  I'll be watching the IV in the next few days before and after the ex-dividend date of 2-Nov.

AGG Dividend capture -- update-- good news, bad news, and dumb news (final)

The good news..  AGG will distribute .342 per share on October 7th,  also good news,  I sold my AGG at  104.90 on October 2nd,  $0.18 higher than what I bought it at on the September 29th.  So far so good.  The bad news, PST, the double inverse 7-10 year treasury bond fund dropped like a rock-- dropping as low as 51.09 -- from my buying price of 52.36.   The dumb news: of course the long 7-10 year treasury bond funds goes ex-dividend on the first of the month also, and the short funds make sure there is no hedge opportunity there.  Its payout was .25.  PST closed at 51.55 today, so overall I am +(.34+.18)*100- .81*50 = +$7 per every 100 shares of AGG invested.  Not too exciting.

The timing of the ex-dividend was interesting.  The market on that day was off pretty strongly, and investors were bailing out of equities and apparently moving into bonds--that sector had a good day.  AGG traded at least briefly at 104.72, which would have gotten me out at my entry price.

The equities market is rebounding, and the bond funds seem to be weakening a bit.  I might hang on a bit and try to get back to my original .33 per share goal.

Final   8-October

   PST dropped  nearly to 51.00 yesterday, and the general trend line is disturbing, so when I saw PST bounce back to 51.66 I decided to close things out.   Final profit  (+.34+.18)*100- .70*50 = +$17.  This is 0.17 cents per share of AGG.   In general this experience reinforced my impression that it is tough to find a good hedge for a dividend capture play--in this case the ex-dividend date synchronization of the various bond type funds on the 1st of the month was my downfall.   Glad to get out with an overall profit.

AGG dividend capture -- using PST as a hedge

AGG should go ex-dividend on Thursday--last month's payout was .33, so I expect a similar amount.  I bought AGG at 104.72 and bought PST, which is a double inverse 7 to 10 year term treasury bond ETF at 52.36.  I did a couple of quick samples that showed PST moves at about 4 times the percentage move of AGG.  I could be pretty wrong on this--I just checked a couple of random time periods.   I was just looking for something that would compensate for my AGG position if the bond market in general went south.

To set up the hedge I want the dollar changes in the AGG to be offset by the inverse changes in PST.   If I bought 100 shares of AGG, that would be $10,472--since PST moves at -4X the rate I would buy $10472/4 of PST or around $2618.  PST was at 52.3 at that point so I divided 2618/52.3 which gives 50.057 shares.   So for every 100 shares of AGG I bought 50 shares of PST as a hedge.   These ratios have to be refigured each time a position is put in place depending on share prices, it is just coincidence that they ended at a 2 to 1 ratio this time. This hedge is not suitable for a long term holding because of the inherent behavior of ultra-short ETFs but it should be fine for the relatively short time I hope to hold this position (less than a week).  My exit point is an overall $0.33 per share gain on my AGG--with or without the dividend.

PST apparently does not do regular distributions (which is not unexpected it being an inverse fund)--I checked to make sure.  They do capital gains distributions occasionally.   If the hedge is perfect I would hope to exit at the same investment level in absolute dollars on the shares--and collect the AGG dividend.

Capturing dividends--the path to low risk returns?

For a long time I have been intrigued with instantaneous jumps or in trader parlance "gaps" in stock prices. As near as I can tell there are 3 sources of these sorts of jumps where a stock price makes no attempt to trade at intermediate values, but rather pops up or falls immediately to a new level:

1. News surprises (e.g. due to earnings warnings, analyst upgrades, business deals, market panics),
2. Large blocks of stocks being bought or sold, and
3. Dividends. Dividends are interesting because they are announced ahead of time to happen on a certain date. On the "ex-dividend" date any shareholder that owned the stock prior to that day becomes eligible to receive a stated amount of money per share of stock that they own. It doesn't matter if you have owned the stock for one day before or 5 years --that money shows up in your brokerage account typically a couple of weeks later on the "distribution date".

The first two are inherently unpredictable, but wiht dividends, at least the date, and usually the amount is predictable.

With dividends the amount of money can be significant--for example NAT just paid out a dividend of $1.88 on a stock that was trading around $36 -- a 5.2% payout. At 1st glance this looks like a great deal, but like all things on Wall Street there is no free lunch. For starters, at opening, the day that the dividend is locked in--the ex-dividend date-- the stock typically drops an amount that is equivalent to the dividend. So, if you buy the stock to collect the dividend, you need to remember that the stock+dividend price at opening on the ex-dividend day will give you about a wash. The fun then begins as to whether the stock bounces back up to the previous day's level or drops due to participation in the general market action. Welcome to day trading....

Because of this dependence on market action, just buying stocks to capture the dividends is an iffy deal. I will write more posts on this subject detailing some of my attempts at capturing dividends without being immediately embroiled in market action.