There are few less risk / zero risk strategies in the share market. Dividend Capture Strategies are one of them.
There are plenty of companies that pay dividend yields that are much higher than what you can get on completely risk-free investments. But, how to control the downside risk of price movement?. The challenge is to close out your position with a profit that is worth the risk. Typically the stock will drop by about the dividend amount when it starts trading on the ex-dividend day, but if the stock has a generally up day your overall profit can be better than the dividend. You lose money if the stock drops by more than the dividend amount.
By taking the future contract in the opposite position of the stock in the same ratio can avoid the risk of downside movement of stock.
We are now on a company financial result period. Let us look at Ceat Ltd. Ceat Ltd. Ex-dividend date is at 28 Jul.
Buy Ceat stock at 1874 – quantity equal to one lot Future contract. In this case 700 ea.
Sell Ceat Future at 1872. In this case your maxim risk is 1400 rupees which is price difference between spot and future.
Capital required for this trade is :
Stock : 1874 x 700 = 13,11800
Future Margin approx.. 98,000
Total : 14,09800 Rupee
Ceat announced Dividend 11.5 rupee per share.
Total dividend to receive : 11.5 x 700 = 8050 Rupee
Expense on hedging with future : 1400 Rupee
Maximum profit on this trade : 6650 rupee which is 0.5% of Capital Investment.
Percentage return is not much attractive. But the advantages are : zero risk & dividends are tax free !
There are plenty of companies that pay dividend yields that are much higher than what you can get on completely risk-free investments. But, how to control the downside risk of price movement?. The challenge is to close out your position with a profit that is worth the risk. Typically the stock will drop by about the dividend amount when it starts trading on the ex-dividend day, but if the stock has a generally up day your overall profit can be better than the dividend. You lose money if the stock drops by more than the dividend amount.
By taking the future contract in the opposite position of the stock in the same ratio can avoid the risk of downside movement of stock.
We are now on a company financial result period. Let us look at Ceat Ltd. Ceat Ltd. Ex-dividend date is at 28 Jul.
Buy Ceat stock at 1874 – quantity equal to one lot Future contract. In this case 700 ea.
Sell Ceat Future at 1872. In this case your maxim risk is 1400 rupees which is price difference between spot and future.
Capital required for this trade is :
Stock : 1874 x 700 = 13,11800
Future Margin approx.. 98,000
Total : 14,09800 Rupee
Ceat announced Dividend 11.5 rupee per share.
Total dividend to receive : 11.5 x 700 = 8050 Rupee
Expense on hedging with future : 1400 Rupee
Maximum profit on this trade : 6650 rupee which is 0.5% of Capital Investment.
Percentage return is not much attractive. But the advantages are : zero risk & dividends are tax free !
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