Still thinking about a way to capture the Phillip Morris (PM) dividend I thought that it might make sense to go back to just before the dividend amount is announced and see if it is possible to do a delta neutral trade that makes sense.
Here is the closing price data from Thinkorswim:
| Date | Stock | Oct 46 C | Time Value | Delta | Dec 46 C | Time Value | Delta |
| 9/14/2009 | 47.66 | 1.95/ 2.1 | 0.29/ 0.44 | 700 | 2.95/ 3.1 | 1.29/ 1.44 | 600 |
| 9/15/2009 | 46.9 | 1.45/ 1.5 | 0.55/ 0.6 | 600 | 2.55/ 2.65 | 1.65/ 1.75 | 550 |
| 9/16/2009 | 47.5 | 1.8/ 1.9 | 0.3/ 0.4 | 700 | 2.8/ 2.95 | 1.3/ 1.45 | 600 |
| 9/17/2009 | 47.53 | 1.8/ 1.9 | 0.27/ 0.37 | 700 | 2.85/ 2.95 | 1.32/ 1.42 | 600 |
| 9/18/2009 | 48.18 | 2.15/ 2.25 | -0.03/ 0.07 | 900 | 3.1/ 3.3 | 0.92/ 1.12 | 650 |
On Tuesday 15th September, Phillip Morris declared what the dividend would be. That takes most of the uncertainty out of the payment on 9th October. To make any money we have to take on some risk. So putting on the position on Monday the day before, we could buy shares and sell in the money calls. Since the stock was at 47, I picked the 46 call to sell.
To make the trade delta neutral, one would have to sell 13 calls for every 1,000 shares bought. That is probably the right way to do it. Unless one can show that there is interest in a stock when it is about to pay a dividend and there is an upward bias to the price. If that were true, then one can sell calls one for one and have a positive delta.
By the end of the week, 18th September, the time premium has disappeared in the Oct 46 call bid. That means that the call will be exercised next week, the day before the ex-dividend date, 24th Sept. In that case, one can close out the position, there is no more to be gained.
The return after paying the bid ask spread is $130 for the delta neutral position, a return of 0.28% for the week, and $220 for the straight buy write, 0.48% return. The dividend would have been $580.
Another possibility is to try this as a calendar spread. I will come back to this tomorrow.
You are assuming collecting 100% of the time premium. But you are 13 x 10. Thus, if the stock takes a good move, you are going to lose money on the gamma.
I understand this stock is not volatile, but you cannot assume that you can repurchase those 3 extra calls with no loss.
Good points, as always. If I understand you correctly there are two related issues. 1) I am assuming that I collect 100% of the time premium. 2) Gamma risk of the position.
The data I used was limited to closing option prices. So I assumed I would sell the calls at the bid and buy them back at the offer. That is how I accounted for the bid ask spread.
Gamma risk: It’s true that I set the position at the start as long 1,000 shares and short 13 calls and did not adjust it. I would adjust it if I was trading it. Unless I find that there is an upward bias to individual stock prices when dividends are announced. Then, the extra positive delta of the 10 X 10 would make sense.