Dividend arbitrage - Trading-Lab

rookie · #1 07-24-2007, 04:10 PM

I remember reading somewhere of a strategy involving buying a stock about to pay a dividend, selling call against it, and pocketing the dividend. I don't remember the exact details of it, but it was used to capture small percentages of profits on stocks about to go ex-dividend. people referred to it as dividend arbitrage. has anyone ever heard of that?

Alchemist · #2 07-27-2007, 12:25 PM

hello rookie,

you mean BUY stock, SELL calls, AND pocket the dividend? Two things to note:

if the stock is above the calls strike price, calls can be exercised and stock called from you
by selling covered calls, you are limiting your downside protection in case the stocks takes a big dive. Losses can be higher than what any dividend or call premium can cover.

does it make sense?

rookie · #3 08-03-2007, 06:23 PM

yes. So this is not really an arbitrage, is it? Then, why do they call it "arbitrage"?

daytraderB · #4 08-15-2007, 06:28 PM

the term arbitrage is also commonly used to describe trading strategies whose risk is very limited or very close to zero. Pure arbitrage, on the other hand, is totally risk free. Unfortunately, it's very hard these days to find pure arbitrage plays, as they tend to quickly disappear as the big arbitrageurs enter the markets to take advantage of them.

rookie · #5 10-02-2007, 03:18 PM

thanks for clarifying that out.

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#1 07-24-2007, 04:10 PM
rookie Member Join Date: Jul 2007 Posts: 86	Dividend arbitrage I remember reading somewhere of a strategy involving buying a stock about to pay a dividend, selling call against it, and pocketing the dividend. I don't remember the exact details of it, but it was used to capture small percentages of profits on stocks about to go ex-dividend. people referred to it as dividend arbitrage. has anyone ever heard of that?

#2 07-27-2007, 12:25 PM
Alchemist founder of Trading-Lab Join Date: May 2007 Location: New York, NY Posts: 296	hello rookie, you mean BUY stock, SELL calls, AND pocket the dividend? Two things to note: if the stock is above the calls strike price, calls can be exercised and stock called from you by selling covered calls, you are limiting your downside protection in case the stocks takes a big dive. Losses can be higher than what any dividend or call premium can cover. does it make sense? __________________ Happy Trading!

#3 08-03-2007, 06:23 PM
rookie Member Join Date: Jul 2007 Posts: 86	yes. So this is not really an arbitrage, is it? Then, why do they call it "arbitrage"?

#4 08-15-2007, 06:28 PM
daytraderB Member Join Date: Jun 2007 Posts: 63	the term arbitrage is also commonly used to describe trading strategies whose risk is very limited or very close to zero. Pure arbitrage, on the other hand, is totally risk free. Unfortunately, it's very hard these days to find pure arbitrage plays, as they tend to quickly disappear as the big arbitrageurs enter the markets to take advantage of them.

#5 10-02-2007, 03:18 PM
rookie Member Join Date: Jul 2007 Posts: 86	thanks for clarifying that out.