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Has anybody actually done this? It is easy enough to do:
Essentially, you buy the actual stock and short the synthetic stock.
Specifically, buy the stock, and then go short a call with strike price equal to the stock price, then go long put with strike price qual to the stock price, and finally borrow just enough money so that you owe exactly the initial stock price at option expiration time. You will have bought every dividend up till the options' expiration date.
Here's a case-study. I have used actual data from today's financial data.
Stock: TEVA - Trading at 50.01 (for simplicity, let's assume it's trading at 50.00... it's close enough)
A call expiring at 01/18/13, with strike 50, has a bid-ask of 7.15 - 7.50. Taking the middle, we get a value of about 7.35.
A put expiring at 01/18/13, with strike 50, has a bid-ask of 6.95-7.40. Taking the middle, we get a value of about 7.20.
Notably, TEVA dividends are paid every February, May, August, and November. They have been consistingly increasing as follows:
In November 2008, dividends were at 11.7 cents per share.
In November 2009, dividends were at 15.8 cents per share.
In November 2010, dividends were at 19.3 cents per share.
Anyway, the stratedgy costs (50-48.25)-(7.35-7.2)=$1.60 [assuming an interest rate of 3.25]
We break even if the company's dividends pay out $1.60/8 = 20 cents on average. However, due to the annual growth of the dividends and generally high targets set by analysts, we can reasonably assume dividends on average will be 25 cents for the next 8 payments (also, remmember that intermmitent dividends can be reinvested. So even if you believe dividends will be slightly lower, 25 cents can allow for reinvestment.)
8 * 25 cents is $2.00. This is a net difference of ($2.00-$1.60) = 40 cents... or 25% return in about two years. This is an annual return of 11.2%.
This admittedly didn't account for trading costs, but in large firms such costs are marginalized.
So... any opinions? What do you guys think about such a stradegy?
Essentially, you buy the actual stock and short the synthetic stock.
Specifically, buy the stock, and then go short a call with strike price equal to the stock price, then go long put with strike price qual to the stock price, and finally borrow just enough money so that you owe exactly the initial stock price at option expiration time. You will have bought every dividend up till the options' expiration date.
Here's a case-study. I have used actual data from today's financial data.
Stock: TEVA - Trading at 50.01 (for simplicity, let's assume it's trading at 50.00... it's close enough)
A call expiring at 01/18/13, with strike 50, has a bid-ask of 7.15 - 7.50. Taking the middle, we get a value of about 7.35.
A put expiring at 01/18/13, with strike 50, has a bid-ask of 6.95-7.40. Taking the middle, we get a value of about 7.20.
Notably, TEVA dividends are paid every February, May, August, and November. They have been consistingly increasing as follows:
In November 2008, dividends were at 11.7 cents per share.
In November 2009, dividends were at 15.8 cents per share.
In November 2010, dividends were at 19.3 cents per share.
Anyway, the stratedgy costs (50-48.25)-(7.35-7.2)=$1.60 [assuming an interest rate of 3.25]
We break even if the company's dividends pay out $1.60/8 = 20 cents on average. However, due to the annual growth of the dividends and generally high targets set by analysts, we can reasonably assume dividends on average will be 25 cents for the next 8 payments (also, remmember that intermmitent dividends can be reinvested. So even if you believe dividends will be slightly lower, 25 cents can allow for reinvestment.)
8 * 25 cents is $2.00. This is a net difference of ($2.00-$1.60) = 40 cents... or 25% return in about two years. This is an annual return of 11.2%.
This admittedly didn't account for trading costs, but in large firms such costs are marginalized.
So... any opinions? What do you guys think about such a stradegy?
