Q&A
Since You Asked
| Professional trader Don Bright of Bright Trading
(www.stocktrading.com), an equity trading corporation, answers a few of
your questions. |
Don Bright of Bright Trading
|
DIVIDED PLAY
Do you know the exact time when dividend ownership is recorded? Is
it at the close? For example, MO (Altria Group, Inc.) trades ex-dividend.
Say the dividend tomorrow will be 64 cents. Could someone buy at the close,
sell aftermarket, and capture the dividend (assuming they can sell it aftermarket
near the NYSE close price)? - vhehn
First off, it is the overnight holder (settlement date) of the stock
prior to the ex-dividend date who is eligible for payment. Afterhours trades
are treated as same-day trades for clearing and settlement. It's a nice
idea, but dividend plays are usually contingent on using options in connection
with collecting the dividend. You cannot be a holder on the ex-dividend
date (to receive the dividend), and also be short the stock on the same
date. Some players buy deep in-the-money puts, and also buy the stock,
and exercise the puts the day after the ex-dividend date. This is still
risky, since the stock will open at a price lower than the dividend amount,
but still be called "unchanged." For example, if XYZ closes at
51.00 and has a 50-cent dividend, it will open at 50.50 "unchanged."
So if you sold, you would take the market loss while waiting for the dividend.
Three-way conversions are sometimes used (long stock, short call, long
put) for dividend plays as well, but since we have been doing these types
of plays for decades, the option modeling systems have the dividend included
in the valuations. It really boils down to a simple thing: human nature. Many who see
the stock at a lower price (the dividend amount) are quick to buy some
shares the day after the dividend, running the price back up. When that
happens, you can make out well, but as in most market plays, there is never
a "lock" - just high- and low-probability techniques.
FAIR VALUE PREMIUM/DISCOUNT
In a recent column, you mentioned that you keep up a window of "fair
value premium/discount." I have both eSignal and TradeStation 6 and
would like to know the symbol for that info. Thanks! - Gorden Pfau
This information is not a static symbol. We create a fair-value basket,
which is designed this way: S&P futures price (or SPOO) minus the sum
of the S&P spot price, plus fair value for that day. Some services
actually have the Spoo as a quote showing the differential between the
future price and the spot price, and you would only need to include the
current day's fair value into the equation.
When the futures are trading higher than the sum of the the spot price
and fair value, then you have a premium (PREM), and obviously when the
futures are trading at a price lower than that sum, you have a discount
(DISC) to fair value (FV).
Another point: Since FV is calculated using interest rates, you need
to adjust FV to reflect the mean between "long money" and "short
money." Long money is the extra cash you have on hand hoping to find
a rate of return that will "beat the street." Short money is
the price you have to pay to borrow money to implement your trading strategy
(usually much higher). Since we are simply trading short-term, we like
to use a number somewhere in the middle. Good luck!
ENVELOPES
Would you discuss your envelopes, how you choose them, and your experience
with the number of winners and fills, comparing small-envelope days with
bigger-envelope days? I know a lot of succesful traders don't vary, and
they prefer this style, but on flat days when I get no fills, I feel that
maybe I've left some money on the table. Of course, I don't want too many
fills, either. I have been using 0.9?1.1 with 20 stocks, getting (in a
typical week) two days of no fills, two days of just one or two fills,
and just one day with three to five fills. - Ron
This is somewhat subjective, as are most things in trading. On days
when the spot price is within a couple of points of the SPOO (S&P futures
prior to the opening - I use the e-minis right up to the bell), I use between
a 0.5 and 0.75 envelope. From about two to five points away, I use 0.8?0.9
or so, and up to 8 points, about a 1.0. I go to 1.2 on wild days. Again,
this is very subjective (based on the betas of my stocks, the previous
day/week activity, the VIX, and so on). The idea is to get filled on about
4 or 5 out of 20, and keep a high winning percentage.
As far as "narrow" versus "wide" days, I think they
pretty much even out. I am often surprised as to which stocks I'm filled
on, and which side I'm filled. That is why I try to place most every stock
nearly every day. I will rarely discard a stock due to news (but I do sometimes
- again, it's a subjective call).
E-mail your questions for Don Bright to Editor@Traders.com,
with the subject line direct to "Don Bright Question."
Originally published in the June 2003 issue of Technical
Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2003, Technical Analysis, Inc.
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