Dividend Capture with ZIM?

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I’m curious if any of you have used a dividend capture strategy before. I personally haven’t, but it seems to me that ZIM’s pending $17 dividend is a pretty incredible opportunity for using this strategy. Given the share price, the minimum capital requirement would be about $5,000.

For those who aren’t familiar: dividend capture is basically what it sounds like. The goal is to capture dividend income without tying up capital for long periods of time—and doing it relatively safely. I think in most cases it’s not worth the effort for retail investors since dividends are usually a small percentage payout, but ZIM is a special beast right now. Its upcoming $17 dividend is over 20% of its share price.

I ran some numbers based on Friday’s closing ($79.14)—this is how I think it could play out:

Any time between now and 2 days before ex-div to be safe:

Buy 100 shares: -$7,914
Sell 1x 3/25 50c: +$2,900

Immediately after ex-div (assuming share price drops by the dividend amount: $17):

Sell 100 shares: +$6,214
Buy 1x 3/25 50c: -$1,200

As noted, the above assumes that the share price will drop to accommodate the dividend payout. There’s some disagreement in the ZIM earnings thread as to whether or not this will happen, but I don’t think it actually matters in this strategy anyway. The calls are so deep in the money that the gain or loss of the share price should cancel out that of the calls regardless of what the movement actually turns out to be.

Anyhow, at this point your net gain/loss is roughly $0, and you’ve qualified for the dividend payout—which in this case is $1,700. All for an initial capital outlay of $5,000.

One potential downside is being assigned early and thus not qualifying for the dividend, making the effort all for naught—but that doesn’t seem like much of an issue IMO.

Are there other issues/risks? I’ve never done this before but it seems like pretty easy (and safe) money… a relatively quick ~34% ROI. What am I missing?

EDIT: The $1,700 and 34% numbers are reduced to $1,275 and 25.5%, respectively. Details in this post below.

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Woah.

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I’m struggling to find a hole in your logic. I used to do something similar but was more aiming to capture the the run up to ex dividend date. Worked pretty well in a bull market. Not so much in a bull. But Zim has been doing nothing but bull moves for past year so I might try this. Thanks

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Seems like the biggest assumption (risk) is in fact the share price actually dropping by the dividend amount as well as possible IV disruption which would counter the premium on the calls. Still trying to wrap my head around this in case I missed anything but this sounds like an interesting strategy. Unfortunately the entry is too rich for my port at the moment but I’ll be following to see how this plays out. BOL cheers

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I don’t think this depends on bullish or bearish movement. An extreme bear case might be that the share price drops below the strike you sold—in which case your option gains are maxed ($2,900) while the share price continues to drop and your loss exposure widens.

But… this could be combatted by just selling an even lower ITM call than $50. I don’t see any realistic case where the share price drops below $50, but it’s not impossible. I just took a look and the lowest strike for 3/25 is $45. The capital outlay is still $5,000 per $1,700 dividend payout.

Personally I’d be willing to bet a lot of money that ZIM won’t drop below $45 in the next 11-12 days.

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The key here though is that the call is so deep ITM that its delta is basically 1.0. There should be no impact from IV… unless there’s an extreme drop in share price I guess :man_shrugging:t2:

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Since you’ve already sold the call, is there much concern for the IV anyway? Unless we’re talking about the buy back side.

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I think that’s part of it—you definitely need to sell the call as soon as you buy the shares to minimize price difference. But the crux is that the call is so deep ITM that delta is 1. If the share price goes down $20, the call price goes down $20… IV be damned :man_shrugging:t2:

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(Edit: the price of that option says it’s $26.50, but that’s because there was no volume on it Friday)

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Yeah it really does seem like your only risk is extreme volatility. Aside from that, your hedging the price decrease with the calls. I guess if it does run for whatever reason you’d want to get out before the buyback on the calls outweighs the divy. Worse case your 50c gets assigned early like you said.

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Even if it runs, you could just take assignment. I may definitely give this a shot. Worst case scenario, I’m stuck with some ZIM ¯_(ツ)_/¯

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Well in this case you’d want to buy the call that you sold to close it, since you’d already own the 100 shares… but either way your point stands — worst case is you’d own the stock, and there are definitely worse companies to hold right now :open_mouth:

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Wouldn’t the option contracts themselves get adjusted? 50c becomes 33c. This is screaming “no free lunch” imo

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No, this dividend is ordinary—not a special dividend (confirmed by OCC). The option strikes will not adjust.

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I’ve heard of this strategy before but I always thought you bought a deep itm put instead but selling a call seems pretty smart actually because theta can’t screw it up. This strategy doesn’t really work long term as the time between ex dividend date and the actually dividend can take a while and the returns are small but this could be a really good one off play. I’m going to watch because I’m not trading with that much money but best of luck hope this plays out. Great write up!

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You’re right—I think the opportunity cost is usually too large for retail investors to stomach. For it to be really worth it, it has to be an exceptionally high percentage yield like this play.

I’ve been looking for possible downsides, but every article or mention I’ve found that has anything negative to say seems to always be talking about the super simplistic dividend capture “strategy” of just buying the stock before ex-div and selling afterwards—and of course that isn’t going to work well.

In fact there seem to be relatively few articles that talk about it in terms of pairing a share purchase with selling calls—but that’s the only way this really makes sense to me. This article covers it pretty well though.

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That was the big difference in the dividend play I was doing for awhile. Selling the calls

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@SB this sounds brilliant! Can’t think of a reason why it should not work mechanically!

Had a questions though. What are the chances of getting assigned on the deep ITM calls? If the assignment happens before the dividend payout it doesn’t protect us from a possible fall in price after. And if it happens after the payout, we’ve effectively halved the ROI, although it’s still above average by any measure.

Also, we might want to consider the 4/14 options as the 3/25 is extremely illiquid in comparison. The 4/14 isn’t that well developed either, with rather wide bid/ask spreads, but still much better than the 3/25 in comparison.

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Would be waiting until very close to ex dividend date and selling the 4/14 calls be better? I’m still trying to wrap my head around all this and am fairly new to selling options

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What are the chances of getting assigned on the deep ITM calls? If the assignment happens before the dividend payout it doesn’t protect us from a possible fall in price after.

I’m not sure about the chances of being assigned actually—I’ve never sold ITM (and certainly not deep ITM!). But regardless of when assignment happens (if it happens), a fall in share price shouldn’t matter… unless of course it drops below the strike. The profit or loss on the shares should effectively be nullified by the profit or loss of the sold calls.

Also, we might want to consider the 4/14 options as the 3/25 is extremely illiquid in comparison. The 4/14 isn’t that well developed either, with rather wide bid/ask spreads, but still much better than the 3/25 in comparison.

This is a great point. Never having sold deep ITMs, I hadn’t even really considered illiquidity… but of course that could be a problem. I think longer dated calls might also reduce the chance of actually being assigned… but that’s just a guess on my part. I agree 4/14 looks much better (as does July)—I’ll probably try for 4/14.

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Possibly? I think the main thing is you want to sell the calls and buy the shares at the same time (or as close together as possible, anyway).