by Robert Weinstein » Sun Sep 18, 2011 10:53 am

by Robert Weinstein » Sun Sep 18, 2011 11:07 am

From the article http://seekingalpha.com/article/290326- ... ept-1-2011

Gary's comment:
Robert,

This is the 4th article on "buying shares, selling calls and unwinding the position" that you've not disclosed the following:

High yield stocks generally drop by their "lost" dividend value on ex-d day.

So unwinding a position that you prescribe results in a loss.

Possibly less of a loss that the value of the dividend you've gained, but nevertheless a loss. You suggest the buy-sell can be done at a profit; not so.

But tell me I'm not wrong.

Thanks, Gary

PS now stop repeating a post that is essentially wrong, or misleading at best


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My Reply:

Hello Gary,

Thanks for reading my article (all four that you read) and taking the time to comment and ask your question. A lot of people don't understand the mechanics of the markets and how it all comes together. I look at that as a good thing in terms of my trading. If you had done your homework before stating I am posting wrong or misleading information I don't believe you would have. I have a lot of articles here and a journal going back years, and I have a chat room that I have hosted for years with real time results being posted.

I believe it would have been helpful if you had taken the time to demonstrate how my math is wrong, or how the loss you claim would happen actually plays out. This is especially so since right above your comment is an example that you could have used to show how the trade would be a loss.

I will use the above DSW as an example since it's right here and I am not cherry picking. It is one that I talked about in my chat room today and explained it to many people so I can reply right off the top of my head. I also put the trade on today so its a real life fresh example, not just hope and fantasy.

I believe it qualifies as a good example of what you mean by a high yield stock. The next dividend is $2.15 and the price I paid for the stock is 47.08. I covered the stock with September $45 calls for $3.10 or $1.02 over the intrinsic value.

DSW goes ex-dividend on September 16th. This is the same day the option stops trading and the OCC requires exercises by 5. My technical break even is about 41.90 but lets call it 42 to round it off. If DSW is above $42 on September 16th I will make money on this trade, end of story.

If DSW is much above $45 two days before ex-dividend with little or no time premium (or possibly negative if calculated off the bid), I can expect to get exercised at $45 and make a gain of about $1. If its less than 45 but higher than 42, I get to keep the difference between the stock price and 42. If the stock falls below 42, then yes it gets chalked up as a losing trade. There is one other possibility that happens from time to time. The stock could move higher (very possible with this one) by a lot and as we get closer to expiration day, the option may have a bid at or near zero time premium. At that point I would put in a floating bid to stay at the NBBO and hopefully get closed out that way for maybe 0.90 or higher gain.

In a way you are correct that if the stock gets exercised away from me that I will lose money on the stock (47.08 vs the 45 strike price) but the point becomes moot pretty fast when I am holding on to another dollar or more out of the deal that I did not have before.

Gary, I welcome you to point out anything (with the numbers to back it up) that is wrong or misleading with this one or any of the others I posted.

Best,

Robert


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Gary's rebuttal:

Robert,

I understand your points and your math, but I disagree that a trader can get the prices you're submitting.

In your DSW example you cannot today get the net price you paid ($43.98, it's currently about $44.29. Maybe you made that trade some time ago, maybe shortly after the div declare date (Aug 10 or 11, I believe), but it can't be had today. At any rate your DSW is a special case.

In terms of regular examples, I checked your 2 top examples CTL and WM since they both went ex-d today.

I noted yesterday's closing price of the share and the bid price our your suggested covered call and matched it to today's

In both examples, the share price loss is worse that the dividend gain, including the netting of the premium on the sell and buyback of the covered option. A loss by any other name.

If in fact, with DSW, CTL or WM you made your original buy/write move some time ago when premiums were higher than they are now, you are really advocating a buy and hold strategy; not a quick flip.

To summarize, I don't quibble with your math or your stated logic, but I do disagree that you can get the premiums that you advocate, on both the sell and buyback of the covered options.

I know because I tried it a few times, and have the red ink to prove it.

As you say, there is not such thing as a free lunch.

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My Reply back:

Hello Gary,

Thank you for your follow up comment.

As stated in my comment, I put on the trade the same day I made the comment so I know for a fact it could be done as I did it. It was not a fluke either as I thought about adding to it later in the day as there were several times I could put the trade on.

I took a look at the option sales for CTL on the 31st, and the lowest price paid was $1.60. Based on the stock price and the prices the options traded at it would appear that if you wrote the option you would have been called resulting in a gain of 0.35.

What one investor considers a quick flip and another a buy and hold is subjective, but I never used either of the terms in any of my articles.

I also never suggested covering on the ex-dividend date and in fact I put in what parameters I do cover a call at.

While I believe it would be likely that the gain was already made, even if the call was not exercised, CTL is still a winning trade. If the stock was bought at the open for 35.30 and a call written at 2.02, there is a dividend of 0.74 gained and the current position is long the stock covered by the $34 strike option that is decaying fast. At the current price, the option will decay enough to be out of the trade by this time next week. Earlier if the stock moves higher.

So even your example is a winner. I am sorry you have red ink, and it would appear based on your comments that you have been too limiting in your approach. Perhaps you have a broker that has commissions, and or trading structure that will make this not work. I don't know. I do know I have made and do make my living from trading so what I say is not theory, but actual practice.

What I do in all my trading including this method takes time, effort, and understanding. Likely more than most are willing to put in or it wouldn't work for me anymore.

Best to you and I do hope that you are able to find something else that will work for you.

Best,

Robert


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Gary's Reply:

Robert,

Thanks for the response, at least you're not afraid to argue your position despite being wrong.

As I mentioned I believe the DSW case is unique, because it involves a special $2 div. But nevertheless, I stand by my assertion that a trader could not have gotten the net price you did (or claim).

But having said that, things change (isn't the market just like that?), and I hope you did take advantage of the dip in DSW and buy some more, and sell more Sept 45 calls, because your net price is even lower.

But enough of your special case and let's talk about the ones you recommended to readers - CTL

You wrote the article late Aug 29, and recommended a buy/write strategy with a post ex-d unwind (I know, not necessarily the following day).

In the case of CTL, you suggested selling a call 35 cts over IV. Even if that was doable. I told you the stock (of a hi yield company) would fall by at least the value of the div, but the call would not fall by the same value. No, you're correct, I didn't exactly say that. I said you wouldn't get a net of stock sale and option buy-back that would make the trade positive.

What happened with CTL ?

The stock declined (as predicted), and quite so, I might add, but I didn't see that coming. So, even if the option went to zero, the trader would have a terrible loss, if he chose to unwind. But as (or was it murphy) said a loss is only a loss, if you take it. So if said trader decided to hang on, he might have regained he lost value; but one wonders why take the paper loss in the first place, just to gain a dividend ?

That's the case with CTL; how about your second choice WM ?

It fell 96cts on ex-d day, all for a 36ct diviidend; worth the buy/write? I think not. But that's my point.

The facts and figures of your suggestions are there for readers to see. And, it begs the question . . .

If you make you living trading, and you're recommending these flawed strategies, how come you don't follow your own advice?

Your disclosure says . . . you don't.

So, if it's not good enough for you, why should it be right for a reader ?

Gary


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My Reply:

Hello Gary,

There is not a lot of reason for me to put in the time to walk you though it. You are the type of person who thinks they know a lot more than they really do. A simple check of the time and sales of the options would have demonstrated that I made the trade the way I said (or at a minimum showed it could have been done). You didn't check it because you don't know enough to check it. I am more than happy to help those that do not understand a concept, and I make myself available everyday in a free chat room. But i have little time for those that are ignorant and arrogant at the same time.

I don't really enjoy having my honor questioned, and your last comment is the second time you have done so.

So allow me to wish you and yours a very enjoyable labor day weekend as well as the best of luck with your investing


Robert



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By the last post my frustration is starting to show. It really should not be though. Gary is probably not that different than many retail traders who have not kept up with the changing markets. As someone who has been trading since the mid 80's I know there are trades that a retail trader would not be able to make when I started that are easily made now. I also know that different brokers offer better trading than others. If Gary is with a large old shoe broker that charges $25 a trade plus is selling order flow, there is no way he can make the same trades as I can. He may simply be under the impression that the deal he has is as good as it gets. So his statements while wrong, may reflect the reality from his situation. This brings up a lesson in of itself. Understanding the markets and how your broker impacts your trading either positively or negatively is as important as understanding when to buy and when to sell.

by Robert Weinstein » Sun Sep 18, 2011 11:18 am From the article http://seekingalpha.com/article/292870- ... -dividends

Looking at the comments, it appears that either part of or complete comments have been removed made by Gary. I tried to find missing comments on Google cache but did not find any. Here is what I have then.

Gary:
To add to VL's comment re forex; the investor should also be aware of foreign withholding tax (15% I believe), for Canadian dividends.

In an after tax account you'd get credit from the IRS; but in a non-taxable account IRA you will not.

Additionally, as I've mentioned in other posts, in the case of hi-yield stocks, the share price will likely decline on ex-d day (all things in the market being equal), to reflect the loss of dividend value no longer inbedded in the share value.

The option value does not similarly decline, making the unwinding (sell share and buy-back option) difficult to exercise at a net price greater ($.20 in this example) than when setting up the position.

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Gary,

Thank you for reading my articles, but your comments continue to show you lack of understanding. I strongly urge you to do more reading and less statement of facts as some readers may become victim of your false inforamation.

For US traders, there is no foreign tax issue with NYSE stocks and BNS trades on NYSE.

"In an after tax account you'd get credit from the IRS; but in a non-taxable account IRA you will not." -Are you a qualified tax professional, that can provide investment tax advise to others? If so declare it or if you do it again I will be forced to advise SA in an effort to protect readers of my articles.

Sorry, once again you are wrong, but time value of options decline as they approach expiration date. That is a fact that even basic level option traders understand.

Seriously and respectfully, stop posting incorrect information on my articles.

Robert

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Gary:

Robert,

Your comment:
"For US traders, there is no foreign tax issue with NYSE stocks and BNS trades on NYSE"

The only correct part of that statement is that BNS is traded on the NYSE.

The dividends originate from a Cdn company and they are required by federal law to withhold taxes at source before sending funds outside the country.

But as I stated in my supplementary comment, the trader gets a tax credit from the IRS (except in an IRA).

How do I know? Because I live it. I own Canadian banks.

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Gary:

Gary,

You are no longer allowed to post comments on my articles without sources. You have consistently provided wrong information, you never provide sources, and as I stated before you think you know a lot more than you actually do.

I am also reporting you as I said I would. You have not declared yourself a tax professional and yet you continue to state what appears to be erroneous tax information. For everyone that has followed this article I would like to direct you to IRS publication http://www.irs.gov/pub/irs-wd... and also to consult with a real tax advisor.

Exchange rate effects on stock are reflected in the beta of the stock. The implied volatility of the option is reflected from the beta in the stock. As a result, expected variances are priced into the options, just like interest rates are. To not have the beta of the stock priced into the options would require the options to be mis-priced, and create opportunity.

If someone believes that a trade I am making will be unprofitable they can take the other side and make money if they are correct. You have not suggested taking the other side of the trade because either you know your wrong or you don't know enough to know it's a zero sum game.

Remember Gary, no source= no comment for you. You have simply crossed the line to many times.

Robert


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Gary:

Robert,

You simply "don't know what you don't know"

You don't know the tax treatment of foreign dividends, and you don't know the forex impact on foreign stocks traded in the US.

To simplistcally tell your readers that "it's all OK because the stock is traded on the NYSE and therefore (implied) sheilded from those issues" is so naive, it's laughable.

You keep asking me for source, and I keep telling you - experience

I have lived and experienced the issues I've highlighted. I am the source.

You need to do your own due diligence and stop asking me to do it for you; or accept my experience as fact.

You've not been able to prove me wrong so far. Your retorts are mere bluster.

As I started off - you don't know what you don't know.

As for banning me - if you personally can do it, I guess it'll get done. But SA won't, because when they read your simplistic articles and my rebuttals, we both know what their decision will be.


BTW - if you really want to do some serious DD about tax treatment and properly advise your readers, rather than post a US IRS site, you should be posting the tax site from the home country (that would be Canada in this case) where the tax is being withheld to understand their treatment of flowing dividend funds offshore (the 15% withholding, I speak of).

You won't find it on a US IRS site, because they don't know if and how much a given foreign state will withhold.

As I said earlier, I'm not going to do your DD for you, but that same IRS site you posted will have somewhere in it, the statement that the IRS affords tax credits to taxpayers that pay withholding taxes to foreign nations.

In case you haven't figured it out yet Robert, I'm from Canada, living in the US for 15 years, so I know of what I speak.

As I've posted several times already; my source is my experience

So stop trying to deflect from the real issue at hand, by asking me to post or quote source; and read the facts for what they are - the truth

Have a grand day, Robert


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My reply:

Ok Gary,

We are all clear now.

Your source is your experience. No reason for anyone to give any consideration to the IRS publication or the fact that I actually traded DSW and the tape shows the same.

Readers can compare the exchange time and sales records and the IRS publications against your "experience" and decide which source is the more credible.



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Gary's reply

Robert,

At least I have experience. Your disclosure indicates you've not once invoked the buy shares- sell call options for regular hi-yield dividends for which you've posted, except for the very unique case of DSW which you didn’t tell us about, until posting it in a rebuttal to my exposures of your inaccuracies. You and I both know that to be true, as do readers, of which there don’t seem to be too many, huh ?

Kudos for picking DSW, BTW. For all the other many hi-yield regular opportunities you've posted, you've shied away from by your own admission, so you've no experience in that field.

With regards to the tax and forex, you know nothing and post yourself deeper into inaccuracies.

Did you even read the IRS site you posted ?
And even if you did, did you not understand it ?

It's about the Canadian tax treatment of income distribution of royalty trust units engaged in oil and gas exploration, not dividends; such as those from our favorite Canadian Bank, Nova Scotia.

They're different issues Robert.

The letter is about:
Pengrowth (symbol PGH)
Penn West Energy (PWE)

Check them out.

Oh, and I have experience with them as well; so I knew exactly what the letter was referring to when I read terms like: royalty trust and income distribution.

It's about gas and oil exploration income distribution. Your letter is not about dividends from Canadian banks.

My statement on the tax treatment of dividends stands.

And you want chastise me about publishing inaccurate facts ?


Here you go Robert

02/28/2011 BMO BANK MONTREAL QUEBEC F
type: QUALIFIED DIV $503.13
02/28/2011 BMO BANK MONTREAL QUEBEC F
type: FOREIGN TAX PAID -$75.47


Cut and paste from my personal account. Foreign tax paid to Canada for Bank of Montreal dividends. It's already been converted to US funds, so there is a forex impact.

But as I accurately posted, I'll get a tax credit from the IRS for the same dollar amount.




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My response:

ello Gary,

I believe the best course of action is to consult with a tax advisor. If you are correct about the tax treatment I have no problem saying so.

As far as forex impact on options are concerned. IF the expected impact of forex was NOT priced into options, it would mean the options would be priced to cheap. This would cause people to buy the options because of the profit potential, of course this in turn would cause the options to increase in price until there is an equilibrium. So there is no free lunch. Forex impacts on stocks that have a large forex component in valuation will have it priced into both the stock and the options that get traded.

I hope that makes sense.

When the DSW trade is finished which is expected either tomorrow or on Friday i will find another dividend paying stock to do the same thing with. This is something I do over and over with and all the articles are viable candidates. There is really nothing all that special about one over the other.

I don't write articles for the sake of writing articles. They are based on my research to see what I want to put my money in and that is what gets submitted to SA.

by Robert Weinstein » Sun Sep 18, 2011 12:22 pm

by Robert Weinstein » Sun Sep 18, 2011 12:25 pm

Robert Weinstein