Dividend As Premium?

[BlueHorseshoe 10]

I'm relatively new to ETFs and haven't paid dividends too much attention, but I'm just pondering the following hypothetical idea . . .

 

1) buy an ETF in time to qualify for the dividend

2) set a stoploss equal to the amount of the dividend payment less my costs

 

This should then give me a completely "free" trade. The trade will have zero downside and unlimited upside.

 

Providing outsized moves with low MAEs occur with sufficient regularity (as the likes of Taleb would have me believe), then I should make money. But unlike the options buyer, my downside is limited to zero, and the dividend has not been carefully "priced" in the way that an option premium has to negate my opportunity to profit (assuming the options pricing formula is valid).

 

What blindingly obvious thing am I missing here?

 

BlueHorseshoe

[BlueHorseshoe 10]

Why focus on dividend capture?

 

If stocks regularly fail to fall by the dividend amount on the ex date, why not aim to capture an outsized return from price gain rather than just the dividend?

 

BlueHorseshoe

[MightyMouse 12]

Your stop order will be filled below the level of the price - dividend. When MMs adjust the price, your sell stop becomes a market order below the adjustment. Your loss is the dividend - the adjustment - (the bid ask spread + commission).

[BlueHorseshoe 10]

Your stop order will be filled below the level of the price - dividend. When MMs adjust the price, your sell stop becomes a market order below the adjustment. Your loss is the dividend - the adjustment - (the bid ask spread + commission).

 

Thanks.

 

And I guess the standard dividend capture strategy doesn't have this issue because there's no stop (and massive risk)?

 

I think I'll stick with letting the dividends drip into the account and treat them as nice bonus rather than trying to get smart!

 

Cheers,

 

BlueHorseshoe

[SIUYA 11]

It sounds like you are talking about dividend capture strategies.

They work well in bull markets (go figure!) but there is a lot of literature from brokers on this, about how many days it takes for a stock to regain its dividend.

A better strategy might be to look to add when a stock in an uptrend falls by x% more than its dividend.????

[BlueHorseshoe 10]

It sounds like you are talking about dividend capture strategies.

They work well in bull markets (go figure!) but there is a lot of literature from brokers on this, about how many days it takes for a stock to regain its dividend.

A better strategy might be to look to add when a stock in an uptrend falls by x% more than its dividend.????

 

Hi Siuya,

 

I was basically wondering what happens if a position is established in the same way as for dividend capture, but is then allowed to run, using the captured dividend as a backstop on the position.

 

Basically, a trend-following strategy that uses the dividends to "insure" the stopped out trades.

 

If what MM describes is correct, then this wouldn't really work.

 

I like your suggestion of looking for stocks that decline by a greater amount than their dividend though . . .

 

Cheers,

 

BlueHorseshoe