SKC Dividend pairs trading strategy

[skc]

Trade #6

Long 3333 IAG @ $3. Dividend 7c, 100% franked. Gross = 10c (3.33%)
Short 1236 SUN @ $8.09.

Capital used = $80k

A few candidates passed up...
TRG - 20c dividend. Too illiquid.
FGL - 13.25c dividend. No franking.
SHL - 35c dividend. Only 28% franking

 

[skc]

Trade #5

Long 11,764 APN @ $0.85. Dividend 3.5c, 100% franked. Gross = 5.0c (5.88%)
Short 625 NWS @ $16.02

Trade #5 long is APN.

 

[skc]

Trade #3

Long 1587 IFL @ $6.30. Dividend 22c, 100% franked. Gross = 31.43c (4.99%)
Short 2532 PTm @ $3.95.

Trade #4

Long 4340 TTS @ $2.31. Dividend 11c, 100% franked. Gross = 15.71c (6.8%)
Short 1200 CWN @ $8.31.

Trade #5

Long 11,764 @ $0.85. Dividend 3.5c, 100% franked. Gross = 5.0c (5.88%)
Short 625 NWS @ $16.02

Capital used = $60k

Trade #3 Closed
Sell IFL @ $6.22. Cover PTM @ $4.00

Trade #5 Closed
Sell APN @ $.845. Cover NWS @ $16.26

 

[skc]

Trade #6

Long 3333 IAG @ $3. Dividend 7c, 100% franked. Gross = 10c (3.33%)
Short 1236 SUN @ $8.09.

Capital used = $80k

Trade #6 closed

Sell IAG @ #3.03
Cover SUN @ $8.23

 

[skc]

Trade #4

Long 4340 TTS @ $2.31. Dividend 11c, 100% franked. Gross = 15.71c (6.8%)
Short 1200 CWN @ $8.31.

Trade #4 closed

Sell TTS @ $2.20
Buy CWN @ $8.40

 

[skc]

P&L Summary

Trade #3 +$213.21. FC = $149.6
Trade #4 +$204.60. FC = $204.6
Trade #5 +176.5. FC = $176.5
Trade #6 +228.03. FC = $99.99

Total Franking credits collected so far $759.25.
Total P&L = $1005.

 

[craft]

P&L Summary

Trade #3 +$213.21. FC = $149.6
Trade #4 +$204.60. FC = $204.6
Trade #5 +176.5. FC = $176.5
Trade #6 +228.03. FC = $99.99

Total Franking credits collected so far $759.25.
Total P&L = $1005.

SKC

Where did you buy your calculator?

I wouldn’t mind buying one myself

 

[skc]

P&L Summary

Trade #3 +$213.21. FC = $149.6
Trade #4 +$64.9. FC = $204.6
Trade #5 +347.29. FC = $176.5
Trade #6 +228.03. FC = $99.99

Total Franking credits collected so far $759.25.
Total P&L (All 6 trades) = $1005.

Oops.. I went cross-eyed on Excel and read the wrong column.

SKC

Where did you buy your calculator?

I wouldn’t mind buying one myself

Lol. The magic calculator which turns all your trade into profits is available at Diagon Alley.

 

[craft]

Oops.. I went cross-eyed on Excel and read the wrong column.



Lol. The magic calculator which turns all your trade into profits is available at Diagon Alley.

You sure you are not at least still using a 'RM' calculator.

Trade 3 as an example

Loss on Long $126.96 [1587*(6.22-6.30]
Loss on Short $126.60 [2532*(8.31-8.40)
Gain on Div $349.14 [1587*.22]
Total Gain $95.58 less commissions. (Franking Credits $149.63)


Or am I missing something?

 

[craft]

Or am I missing something?

I worked it out - Your gain includes the Franking credit. I initially read it as a raw trade prrofit plus franking credit.

Keep up the good work.

Cheers

 

[skc]

You sure you are not at least still using a 'RM' calculator.

Trade 3 as an example

Loss on Long $126.96 [1587*(6.22-6.30]
Loss on Short $126.60 [2532*(8.31-8.40)
Gain on Div $349.14 [1587*.22]
Total Gain $95.58 less commissions. (Franking Credits $149.63)


Or am I missing something?

The P&L includes franking credits.
So $95.58 + $149.63 - $32 (commission) = $213.2

Total P&L = $1005, of which $759 is franking credits.

I did say margins are very thin.

This strategy will probably show better reward/risk on down days. At the moment all the hedges are simply costing me money.

 

[skc]

Trade #7

Long 500 MND @ $20.24. Dividend (ex Monday) 55c. 100% franked. Gross = 78.6c
Short 362 WOR @ $27.58.

 

[skc]

Trade #8

Long 2000 AHD @ $5.53. Dividend 27c. 100% franked. Gross = 38.6c (6.97%)
Short Index $3 x $4340.

Can't find a suitable hedge so an index will do for now.

 

[craft]

The P&L includes franking credits.
So $95.58 + $149.63 - $32 (commission) = $213.2

Total P&L = $1005, of which $759 is franking credits.

I did say margins are very thin.

This strategy will probably show better reward/risk on down days. At the moment all the hedges are simply costing me money.

Thanks for clarifying – as you will see above the penny dropped 1 minute before your post.

How much of the capital do you actually need to deploy to fund it?
I’m guessing your using IB. Do you need to fully fund the short positions? Do they net off transaction within T+3? Are they paying you any interest on the shorts?

The margin would be enhanced if the bulk of the capital backing the strategy stays in your own bank account attracting interest.

How many people do I know that haven’t utilised their $5000 franking exemption? Is the exemption applicable to kids?

 

[skc]

Thanks for clarifying – as you will see above the penny dropped 1 minute before your post.

How much of the capital do you actually need to deploy to fund it?
I’m guessing your using IB. Do you need to fully fund the short positions? Do they net off transaction within T+3? Are they paying you any interest on the shorts?

The margin would be enhanced if the bulk of the capital backing the strategy stays in your own bank account attracting interest.

How many people do I know that haven’t utilised their $5000 franking exemption? Is the exemption applicable to kids?

I have deliberately avoided talking about capital requirement for the time being - even though I've listed what maximum capital has been used.

The limitation of this strategy is the $5k franking credit rule. And if you have other investments, chances are you have even lower franking credit headroom available.

Therefore each trade is kept at $10k, because there are so many opportunities over the dividend season and many smallish positions are more than enough to reach the franking credit ceiling. It's not worth risking too much on any one of them, plus it's easier to manage entries and exits.

If capital is an issue, limit the strategy to 1 or 2 pairs each day, and use CFDs on the short hedge where you only need ~10-30% margin. Overall, I think one can easily deploy $40k ($30K in IB, $10K with CFD provider) and capture the $5k over 1 to 1.5 month. It's not a bad return.

WRT how much cash you need with IB - I think funding for short position is the same as for longs. Best check wtih yourself. I am not capital-constrained in my IB account at the moment so I am not that fuss about T+3 and all that.

Short interest income will at the end of the day add very little to the P&L. Say you have open $10k short position every night for a month @ 4% interest = $32.

Do keep in mind though that much of the profits are franking credits which means they don't actually have value until you lodge your tax return. So from a time-value perspective it is more effective to do it in the 2nd reporting season. Esp if you have to borrow the initial capital.

You can however easily do it for yourself in August and your spouse in Feb. There are also misc opportunities through the year for your mistress/girlfriends etc.

As to kids and franking credits - best check with your accountant. I don't think the tax rules are as generous.

Lastly, there are large although rare tail risks with this strategy - the biggest of which is takeover risk on your shorts. Let's say 30% premium on the $10K position is a $3k loss. But the probability of occurance on that one day that you hold would be pretty small. Another being shock news on your position - but again that is mostly reduced by the fact that the company only just reported a few weeks ago.

 

[skc]

Trade #9

Long 559 RHC @ $17.93. Dividend 29.5c 100% franked. Gross 42.1c (2.4%).
Short 872 SHL @ $11.47.

 

[craft]

As to kids and franking credits - best check with your accountant. I don't think the tax rules are as generous.

I think you have inspired me.

Fund the account, stand ready to insure against the tail risk, and supervise the trades. This looks like a good way to get the kids learning, with a good risk weighted reward outcome and a short enough duration to keep their attention.

Have to do some research to see how the unearned income rules for minors mess with the outcome and if the 45day exemption applies to minors.

Thanks

 

[skc]

I think you have inspired me.

Fund the account, stand ready to insure against the tail risk, and supervise the trades. This looks like a good way to get the kids learning, with a good risk weighted reward outcome and a short enough duration to keep their attention.

Have to do some research to see how the unearned income rules for minors mess with the outcome and if the 45day exemption applies to minors.

Thanks

Invoice for inspiration is in the mail.

 

[suhm]

do you do this full time? or is it more of a mechanical filter to initiate trades?

 

[skc]

do you do this full time? or is it more of a mechanical filter to initiate trades?

This strategy is just on the side... like having fries with my burger (which is just straight up pairs trading). My fundamental investing is the coke, and I have a few other strategies as desert. Since I am watching these companies anyway it's not much additional effort for me.

It's not mechanical. Just look ahead at the dividend schedule, find a high yielding, good franking, liquid share, then find a weak looking comparable to hedge. Different people will use different company to hedge and get different results. Lots of discretion required.

The inherent edge in the strategy is that the market places no value on franking credits because of the 45 day rule (and foreign holders), yet it is available for retail holders subject to the $5k ceiling. All other share price movements are bonus if you like.

There is another market inefficiency that creates a small additional edge for this strategy - but I won't disclose it here