SKC Dividend pairs trading strategy

[skc]

Positions closed.

Sell GWA @ 2.03
Buy CSR @ 2.29

Net P/L= $39. F/C collected $166.


Sell FLT @18.50.
Buy QAN @ 1.535

Net P/L= $169. F/C collected $105.73


Sell TOL @ 4.47
Buy QRN @ 3.25

Net P/L= $89. F/C collected $89.84


P&L for the day is $298, or $208 after commissions.

Would have been a much better day had I timed my initial entries better. Ideally I would like for my P&L to be greater that F/C collected to minimise the opportunity cost.
Fairly happy with my fills today. TOL has run a bit since I've exited, but with the market being so volatile at the moment the less time in it the better!

Doesn't seem to be any suitable plays until later in the week now. You have any SKC?

Thanks Sammy. I think a day like today shows the benefit of this hedged strategy. If you just went dividend stripping you would have been burnt quite badly.

Not much in the coming week... the only potential ones are BRG, MIN and RCR, but BRG and RCR can both be quite thin.

 

[sammy84]

New position

Buy MIN 900@ 11.07 3.4% yield
Sell ASL 3080@ 3.14

 

[skc]

New position

Buy MIN 900@ 11.07 3.4% yield
Sell ASL 3080@ 3.14

Noted. Good luck. Going to be a wild night...

 

[sammy84]

New position

Buy MIN 900@ 11.07 3.4% yield
Sell ASL 3080@ 3.14

Position closed

Sell MIN @ 11.17
Buy ASL @ 3.20

P/L- $222. Franking credits $104.

 

[skc]

Position closed

Sell MIN @ 11.17
Buy ASL @ 3.20

P/L- $222. Franking credits $104.

Very strong day today for MIN and mining services in general. Your hedge pick of ASL was actually pretty good as it didn't run much away from you. Again, a correct read of the market's strength today may have yielded better outcome.

 

[sammy84]

Very strong day today for MIN and mining services in general. Your hedge pick of ASL was actually pretty good as it didn't run much away from you. Again, a correct read of the market's strength today may have yielded better outcome.

Agreed. However at the time the strategy seemed correct. I wanted to exit the short at the open given the market strength and I wasn't prepared to leave an unhedged long in this market either. Also, I typically only get between 10-10.30am, 1-2pm, and 3.45-4pm to place enter/exit positions.

 

[SilverRanger]

Hi skc,

Great job in coming up with this market neutral dividend stripping strategy!!

The tax status has no bearing on the competitive advantage of the strategy. $1 in franking credit is no different to $1 in other income. You pay tax on it at the same rate you would pay tax on any other income.

Just a quick comment on the above point tho, $1 in income and $1 in FC is not exactly the same thing, as FC only serves as a deduction. Just as an example to illustrate:

If you earn $10000 in other income, and given a choice of $1000 as trading profit or $1000 in franking credit you will definitely go for the trading profit. In fact, franking credit is only TR / (1 - TR)% (TR is your marginal tax rate) as good as your actual profit

 

[skc]

Hi skc,

Great job in coming up with this market neutral dividend stripping strategy!!


Just a quick comment on the above point tho, $1 in income and $1 in FC is not exactly the same thing, as FC only serves as a deduction. Just as an example to illustrate:

If you earn $10000 in other income, and given a choice of $1000 as trading profit or $1000 in franking credit you will definitely go for the trading profit. In fact, franking credit is only TR / (1 - TR)% (TR is your marginal tax rate) as good as your actual profit

Not sure that is true. FC is added to your income as taxable income, and the full amount is deducted from your tax liability.

So 10k income + $1k FC = $11k total taxable income, @ 30% tax rate your tax liability is $3.3k, offset by FC of $1k, so you actually pay $2.3k tax. Your net cash is $10k - $2.3k = $7.7k which is exactly the same as if you had other income.

Same calculation with any other tax rate.

This from Wikipedia (obviously not the authority in tax)...

The easiest way for an investor to value a franked dividend is to think of the franking credit as part of the income they receive. The investor doesn't get it in cash, only as a kind of IOU from the tax office, but nonetheless it and the cash portion make up pre-tax income. Thus a franked dividend of $0.70 plus $0.30 credit is exactly equivalent to an unfranked dividend of $1.00, or to bank interest of $1.00, or any other ordinary income of that amount. (It's exactly equivalent because franking is fully refundable, as described above.)

 

[SilverRanger]

Not sure that is true. FC is added to your income as taxable income, and the full amount is deducted from your tax liability.

So 10k income + $1k FC = $11k total taxable income, @ 30% tax rate your tax liability is $3.3k, offset by FC of $1k, so you actually pay $2.3k tax. Your net cash is $10k - $2.3k = $7.7k which is exactly the same as if you had other income.

Same calculation with any other tax rate.

This from Wikipedia (obviously not the authority in tax)...

Yes, you are right (obviously doing this stuff only once a year doesn't help in keeping it in my head!)

 

[skc]

Yes, you are right (obviously doing this stuff only once a year doesn't help in keeping it in my head!)

How did people settle such debates beofre wikipedia? You did have me worried for a brief second though!

May be you are entitled to some amendments from the tax office!

 

[sammy84]

New positions

Buy RHG 18690 @ .535 (26% grossed up)
Sell CBA 233 @42.90

Buy SXL 9800@1.025 (4.1% grossed up)
Sell NWs 620@16.07

 

[nulla nulla]

New positions

Buy RHG 18690 @ .535 (26% grossed up)
Sell CBA 233 @42.90

Buy SXL 9800@1.025 (4.1% grossed up)
Sell NWs 620@16.07

You angling for the RHG $0.10 div Sammy? Fairly good % return on the purchase price as long as it bounces back after the ex-div sell down (which in my opinion it should). As always DYOR.

 

[skc]

New positions

Buy RHG 18690 @ .535 (26% grossed up)
Sell CBA 233 @42.90

Buy SXL 9800@1.025 (4.1% grossed up)
Sell NWs 620@16.07

You angling for the RHG $0.10 div Sammy? Fairly good % return on the purchase price as long as it bounces back after the ex-div sell down (which in my opinion it should). As always DYOR.

Logged the trades for you. Probably wouldn't have done RHG myself. It looks like a special div and share price behaviour after special div can be, well, special. When the FC is so fat I think the share price has priced in some of that already.

Tomorrow will be interesting given how far we moved down in the last few days. If we do get a rebound day, the ex-div shares could be disadvantaged... although probably another bloodbath in Europe tonight.

 

[nulla nulla]

Logged the trades for you. Probably wouldn't have done RHG myself. It looks like a special div and share price behaviour after special div can be, well, special. When the FC is so fat I think the share price has priced in some of that already.

Tomorrow will be interesting given how far we moved down in the last few days. If we do get a rebound day, the ex-div shares could be disadvantaged... although probably another bloodbath in Europe tonight.

Yeah, not easy to call at the moment. Trying to find the balance between oversold and likely to be sold down even more in the days ahead. I sat in the queue all day today for a partial fill on IOF. They trade ex-div on monday and it is less than a cent, but the low price ($0.595) should have capacity to rebound even after it goes ex-div. Might have to wait it out a bit though.

 

[sammy84]

Logged the trades for you. Probably wouldn't have done RHG myself. It looks like a special div and share price behaviour after special div can be, well, special. When the FC is so fat I think the share price has priced in some of that already.

Tomorrow will be interesting given how far we moved down in the last few days. If we do get a rebound day, the ex-div shares could be disadvantaged... although probably another bloodbath in Europe tonight.

Agree re the risk with RHG. Based the trade on SIP which had similar sort of yield. From that example it seemed a lot of buyers waited on the sidelines until in went ex to get in. Won't be selling on the open that's for sure though.

 

[skc]

New positions

Buy RHG 18690 @ .535 (26% grossed up)
Sell CBA 233 @42.90

Buy SXL 9800@1.025 (4.1% grossed up)
Sell NWs 620@16.07

Pretty messy stuff today. How did u go?

 

[sammy84]

New positions

Buy RHG 18690 @ .535 (26% grossed up)
Sell CBA 233 @42.90

Buy SXL 9800@1.025 (4.1% grossed up)
Sell NWs 620@16.07

Positions closed,

Sell RHG @ .41
Buy CBA @ 43.01

P/L $276. FC collected $801

Sell SXL @ .985
Buy NWS @ 16.28

P/L ($130). FC collected $126.

 

[sammy84]

Pretty messy stuff today. How did u go?

Just posted results. Was a crazy day. My hedges lost $180 collectively. Could've been worse though given how the day spanned. I'm glad to have come out overall ahead for the day, unfortunately the only profit was in franking credits and I lost $780 in actual cash for the day.

 

[SilverRanger]

Just happened to pick up DJS/HVN today at market close, and HVN is going into ex-dividend next Friday, if the trade lasts til then it may be another example.

Long HVN @ 2.21
Short DJS @ 3.16

The next worthwhile target is probably BOQ next month.

 

[skc]

Just happened to pick up DJS/HVN today at market close, and HVN is going into ex-dividend next Friday, if the trade lasts til then it may be another example.

Long HVN @ 2.21
Short DJS @ 3.16

The next worthwhile target is probably BOQ next month.

Sry missed this post. I won't log the trade as it diverts slightly from this strategy (to be in a stock for as short a time as possible).

I've opened this same trade just as a normal pairs trade today. Long HVN $2.24, short DJS $3.30. Already underwater