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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