Overview of dividend capture strategies

Updated: Dec 7th, 2011 | Vance Harwood

I have written several posts on dividend capture strategies.

My favored, although far from perfect strategy:

Dividend capture with covered calls

Some approaches I don’t recommend:

SPY dividend capture ideas that don’t work

Dividend capture—three approaches to skip

Additional background and tools, and an example:

Dividend capture overview

Covered calls–are you ready?

Combo orders–maximizing profits on covered calls

DIA dividend capture: creating the position

DIA dividend capture: position close out

More questions about dividends?  See Top 10 questions about dividends.

Saving money with combination orders

Updated: Jan 21st, 2013 | Vance Harwood
If you ever plan to trade more than straight long options you should learn to use combination orders, specifically debit and credit orders.
A combo order allows you to execute multiple trades simultaneously at a single integrated not-to-exceed price.  Some examples:
  • Creating a simple covered call position, buying the underling equity and selling-to-open calls
  • Creating a call bear option spread, selling the lower strike call, and buying the higher strike price.
  • Closing out a covered call position.
Combo orders can save you money by:
  • Reducing trading costs—typically commissions are reduced compared to executing the trades independently
  • Beating the bid/ask spread.
  • Eliminating the risk that the market will move against while you are in the middle of creating a two part position
  • Allowing you to explore the best price available on a multiple position sale.
  • Circumventing the $0.05 minimum increments on some option prices.
Combo orders require that you specify whether you want a debit  or a credit order.  Debit orders (sometimes abbreviated “Dr”) require you to put up cash to open the position, for example buying stock, or just going long on puts or calls.  Credit orders (sometimes abbreviated “Cr”) on the other hand deliver cash to you as a result of your trade.  Example credit transactions include closing out a covered call, selling stock short, or a bear option spread.
My mnemonic for keeping this straight:
  • Debit—I go into debt
  • Credit—I get the credit..

Figuring out the order price is the next challenge.   Your broker’s software might suggest a value—but you will probably leave at least a little money on the table if you use this number.  It’s like ordering your combo meal  à la carte rather than buying the “meal deal”.   My goal is to set a price that doesn’t fill immediately, but rather takes several minutes to execute.   When I see a delay I’m pretty sure I’ve gotten close to the best deal available.

I have found that splitting the bid / asked prices is a good starting point for combo orders. If that price doesn’t fill in a reasonable time you can always sweeten the offer.   So for example if I want to create a covered call position with Apple:.

Buy Apple stock    bid 516.01, ask 516.03   (split bid/ask price is 516.02)
Sell-to-open Apple S510 call   bid 17.30, ask 17.60  (split bid/ask price is 17.45)

If your broker’s software suggests a value for this order it would be the ask price on the Apple (516.03) minus the bid on the call (17.30) — for a net debit order of 498.73.

My initial limit price would be 516.02 minus 17.45  which is 498.57

If you get a fill at this lower offer you have saved $0.16 per share.    If your order doesn’t fill after a reasonable amount of time, either the market has moved against you, or your price isn’t sweet enough. Fidelity’s and Schwab’s software will generally allow you to change your price without cancelling your order.  If not —you’ll need to cancel and re-submit to change the price.  Remember on a debit order lower is better for you and on a credit order higher is better.

Partial fills can happen anytime you use a limit style order.   If you are ordering more than unit quantities (e.g., 1 call / 100 shares of stock, or single long/short option pairs) in a combo order you may see only a part get filled.  For example if I want to buy 300 shares of USO and sell-to-open 3 calls the exchange might execute only one third or two thirds of your order.

Generally partial fills are a good thing because it suggests you are right on the edge of what the market makers are willing to do.  Your commission costs are unchanged regardless of how many chunks your order gets divided into during the course of the day.   However if the market closes, or the market moves against you before your order completely fills then you will have to pay another commission if you want to complete your order.  You can prevent partial fills by selecting  “All”  in the “All Or None” (AON) order conditions, but you may need to sweeten your offer in order to get a fill.  I generally put my combo orders in during the morning, and I rarely have a problem.  Either the market won’t bite at all, or if I get some partial fills the order generally completes.

A few other points about combination orders:

  • Orders that mix both stocks/ETFs and options are not automatically handled and generally don’t provide fast execution.  Actual humans have to get involved with these trades, so expect execution in minutes, not seconds after you submit your order.
  • I have seen combo orders go stale  Even though they should have executed they don’t—maybe the brokers lose their sticky notes…   Cancelling and reentering the order will usually trigger execution.
  • You may see a “market” option in addition to the limit option with combo orders.  Avoid these.  Execution may be slow and you have no guarantee of what price your order will fill at..
If spreads are tight and time is of the essence I’ll execute sequential orders rather than take the time to setup a combo order.  I’ll use market orders with very liquid, low spread stocks, ETFs, and options if I’m in a big hurry, but generally I use limit orders with everything.
If you’re cheap and not in a hurry, or if the market is moving fast and you’re trying to create spread-beating, multi-sided positions (e.g., for dividend capture) then combo orders are the way to go.

Dividend capture by buying SPY and shorting IVV?

Updated: Mar 14th, 2013 | Vance Harwood

If your devious dividend capture plan involves you hedging against SPY’s price movements by selling IVV short until after SPY goes ex-dividend you can forget about it. The IVV (Barclays Global) price doesn’t drop by SPY’s dividend amount on SPY’s ex-dividend date. It continues to track the S&P 500 until it goes ex-dividend a few days later. Your master plan will net out with you down by at least your commission costs.

For  IVV and SPY ex-dividend and distribution dates and lots of others  see here.

If you are interested of an overview of dividend strategies—some of which actually work, see this post.

Thanks to Jeff in the comments below for pointing out to me that IVV management doesn’t have to do anything in order for this to play out this way.

IVV vs SPY (June 2010 ex-dividends), click to enlarge

SPY dividend capture–June 2010

Updated: Jun 16th, 2010 | Vance Harwood

I bought SPY at 111.64, and sold-to-open SPY 108 June-30 expiration calls at 4.08 for a net investment (debit) of  107.58.     I used the quarterly SPY options because I could go considerably deeper in the money with the calls and still get a premium that is close to the likely SPY dividend for this quarter  (around $0.50).   Schwab does not appear to offer access to this series of  options, but Fidelity does.

If SPY stays above 111 through this Thursday I expect these options will be assigned–because the premium left on the calls will be less than the dividend the stock will payout.   Friday is the ex-dividend date for SPY.   If the calls are assigned I’ll collect $0.42 per share.     If the options are not assigned, I will collect the SPY dividend–lowering my breakeven point to around 107.08.

For more info on this dividend capture strategy see this post

Capturing dividends with covered calls—are you ready?

Updated: Sep 24th, 2011 | Vance Harwood

In a recent post I gave an overview of dividend capture strategies.

In some situations an effective way to hedge risk with a dividend capture strategy is to use covered call options.  If you are not familiar with options this might sound exotic, but it’s truly the training wheels of option trading.  With covered calls you can introduce yourself to the conservative, hedging possibilities of options while increasing your odds of making modest amounts of money.   Before getting into the details,  please review the checklist below, to see if you are ready / able to do this:

  • Do you have enough capital?
    • This strategy requires you to buy hundreds of shares of stock to make it worth your trouble, do you have the money?
    • You can use margin to buy the stock, but that will increase your costs.
  • Will you be content with a small gain?
    • This strategy is generally not effective with stocks with large dividends (e.g. 4% or higher).  It works better with stocks that offer annualized dividends in the 2% to 3% range
    • On the good news side, you generally get the small gain with less than 10 business days of investment
  • Does the stock/ETF you want to capture the dividend on have a active option market?
    • If the options are thinly traded, or if appropriate strike prices are not available this strategy does not work
  • Are you set up for at least the first level (simplest level) of options trading in your brokerage account?
    • If your account is not an IRA then you will need to have a margin account.  Don’t worry, there are no interest charges or chance of a margin call with this strategy (assuming you don’t buy the stock on margin)
    • This first level of option authorization usually allows covered calls and simple purchases / sales of puts and calls
    • Typically you can do these sorts of trades in a Roth / Traditional IRA — however you do need to apply for that capability if you don’t have it already
  • Are you willing to learn about combo orders? These are orders that simultaneously fill your stock and options orders at a not-to-exceed price
    • These orders are prudent to use in fast moving markets, and when bid/ask prices are widely separated
    • Combo orders are not necessary if bid/ask spreads are small and if you are willing to do fast sequential market orders

Extra Credit

  • Can you make your investment in an IRA account?
    • If so, this dividend strategy is more attractive, because you can defer taxes on any gains

Pass the test?  In this post I’ll give some screening criteria for good positions and the basic setup of this dividend capture strategy.