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American Capital Agency Corp. Message Board

  • blackdog_monkey blackdog_monkey Mar 7, 2013 4:57 PM Flag

    How div adj works: subtract 1.25 from the last trade of 3/17 ...

    record as adjusted close price. Where we open on 3/18 depends on how much after market stuff but generally is somewhere around the ajusted close price, but not always ...

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    • I have always been curious as to why the price changes by almost exactly the amount of the dividend when share holders can buy and sell the stock for any price they choose. The only reason I can come up with is that there must been a time many years ago when people would try to capture the dividend by owning the stock for a few days and the resulting action was to drive the price down by the amount of the dividend and the anticipation of this now causes the price to simply drop as people know that it will and expect it and thus are not willing to pay any more.

      There is no free lunch. That is why you cannot write a covered call on a dividend paying stock expecting to get both the dividend and the higher call premium after the stock price dropped because the shares will get called away from you. Who ever bought that call won't want to hold it through ex div and will close it out. There is no pot of gold at the end of the rainbow unless you are GS selling subprime CDOs to unsuspecting pensions funds.

      • 2 Replies to raybans2
      • raybans2 - the drop is not coincidental. the closing price on the final day of the dividend period is adjusted downward by exactly the dividend price - there is nothing organic about it. the official closing price is simply recorded as the last trade of the day minus the the dividend amount. this is done because at that moment, the dividend is no longer on the company's books. however, where the price opens the next morning on ex-dividend day is subject to overnight market pressures - there is no law that forces the open to be the adjusted close.

        you are incorrect about the free lunch - i have sold covered calls into the close on the final day of the dividend period many times. you have to sell out-of-the-money calls and you do get a somewhat smaller premium because that is already factored into the premium but you do tend to get a sell-off on ex-div that rapidly brings the short calls down, especially if there was a run-up into the dividend.

        the reason for this market action around the dividend has to do with short interest. people who are short the stock will owe the dividend on the shares they borrowed to create the short stock position if they are caught holding the position into the ex-div day. so shorts tend to duck out of a dividend stock into last days of the dividend period, thus, creating a sort of short squeeze. on ex-div, shorts are no longer inhibited by the dividend and may elect to re-establish their position.

      • yourbestfriendintheworld yourbestfriendintheworld Mar 11, 2013 12:51 PM Flag

        It drops because the div doesn't go to the new buyer and the stock is worth exactly that much less at that moment. And it rarely matches the div exactly.

    • There is a certain amount of depletion after dividends for the time in between dividends, as well. Don't forget that.

    • 17th is a Sunday, but anyway..... opening price on the 18th will be ~1.25 less than closing price 3-15. GLTA

 
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