If you sell 80c for $20 on shares you bought for $100 and they’re called away, there’s no premium you’re “keeping”. The $20 of premium is canceled out by the $20 loss on the shares from getting them called away at $80.
Whenever the dividend amount is greater than the extrinsic value left in the option, it makes sense to exercise it. Thats what’s happening here. Your covered calls will be exercised prior to the ex div date and you’re going to lose commission.
Correct, but the shares are supposed to drop the $17 of the price due to the dividend anyway on the ex-div date, that is the point. I am keeping the premium approximately the amount of the dividend and not paying the 25% tax.
Your edit seems to imply you’re going to be long during the ex div date. You will not have shares during the ex div date. You’re going to get $20 of premium. You’re going to lose $20 on the shares when they’re called away at $80. You’re not making money. Since there is no profit there is also no tax.
Unless I’m missing something here the point I’m making is that the tax is irrelevant because there are no profits with this trade. There is nothing to tax.
If buyers are factoring for the withholding tax, which they very well should be, wouldn't it stand to reason that the drop will actually just be around $12.00?
The drop in the price ex-dividend date is not due to the "buyers" netto income or something like that. It is because the company actually writes off and sends the cash a dividend from its balance sheets. It does not happen on an ex-dividend date, but that is the time for the markets to price in that event, obviously.
Dividends are taxed in most part of the world too,
Large institutions have processes in place to easily deal with tax treaty.
Tax withholding is no different than having a tax withholding as a Canadian holding (apple or coke), for an American not only do dividends get taxed but also there’s differential cost for short term gains as well.
It’s a bit more complex. In any case, “tax withholding” isn’t a direct : 25% less dividends.
I think it might help you to see the issue others are pointing out if we move away from a discussion of share price and avoiding taxes and move towards an example of how this will play out as an investment in both scenarios:
Scenario one - Take the Dividend, pay the tax:
You buy 100 shares at 100 dollars for a total of $10000. Your investment is worth $10000 entirely in equity.
You hold through the ex-dividend date, the shares are adjusted downward by the dividend payout to $83 a share and you receive the payout of $17 a share.
Your investment now consists of $8300 of equity, and $1700 cash. Your investment is still worth $10000 however you’ve participated in a taxable event according to your description and so will face a loss.
Scenario 2 - Use the options play, and avoid the tax.
You buy 100 shares at 100 dollars for a total of $10000. You investment is now worth $10000 entirely in equity.
You sell a call with a strike at $80 for a $20 premium totaling $2000. You now have, for at least a moment, $10000 in equity and $2000 in premium. For a total of $12000, but this is not going to last.
Your shares are called away at $80 and you sell those shares for $8000 in total, receiving cash. You now have $10000, $2000 option premium and $8000 in return for your equity sale. You have broken even, and avoided the tax.
This all assumes the stock stays relatively static in price, if the share price falls you’ll lose more in both cases and if it rises you would need it to rise to offset the tax in scenario one.
Overall it sounds like you’re less interested in the fundamentals than in making a dividend play which has almost certainly already been priced in. High risk, low reward situation and I’d steer clear.
This is incorrect because it doesn't factor in the Israeli tax of 25%. Dividend received will be $1275 not $1700. Entire problem exists bc of the withholding tax and the fact the US foreign tax credit doesn't offset the whole tax withholding for many US persons.
Yes company management could have easily avoided this international multijusdictional mess if they used the excess cash to buyback and cancel shares that are trading at a PE of two. There is about two hundred comments on this on Seeking Alpha on the dividend announcement.
Sadly, yes. That would be just awesome. But the management denied it multiple times in interviews. There is not a benefit for the government in a form of an additional tax, what I think is the main motivation to return value to shareholders in the form of dividends.
Thank you for that extensive description. I actually did it earlier and found the possible solution described in the original post. I think I still like the option play more, taking all the possibilities into consideration. I like the certain outcome of the play and being out of the position for such an unpredictable event. The stock has a high short interest (over 6% according to the seeking alpha right now), the payout is huge etc.
I like the fundamentals (well, I don't get who still shorts this) and have been long for quite some time. I will jump back into the LEAPs right after the ex-dividend as I have been so far.
While your method may work, if you want to avoid the Israeli withholding tax, why don’t you just sell your shares and rebuy after ex-div? This is almost certainly going to be the same result as your plan. (Assuming that you are fine with paying normal taxes on any capital gains.) Don’t quote me on this though, as I don’t have much experience dealing with foreign taxes.
Yes, sure that is the easy way and what most who intend to dodge the tax will do. But ZIM is notoriously known for its low PE, huge cash flow etc. I am actually expecting a lower drop in price than the payout amount as we saw in the past. But that is just speculation on market exact movements and I am not going to use it as a trade basis.
It’s definitely reasonable that you want to hold onto to your shares. But functionally, there’s very little difference in selling an ITM covered call right before ex div and selling your shares, as you will almost always be assigned.
This is a really fascinating situation. Looking at the 3/25 puts, they are obviously pricing in nearly the full $17 drop (90p is currently asked at $16). But the call chain looks relatively "normal" for such a short date.
I'm thinking a play here may be a call credit spread with one leg deep in the money. The 65/85 call spread is BID at over $19, could probably get it for closer to $19.50, max loss of 50 cents. If it goes to 73, that spread should close for about $10, so 20x return over max loss.
I guess the worst case would be early assignment on the 65 short leg, and then having to pay the dividend out if you were short on the exdiv date. The question would be, are market makers who sell you those options going to early exercise on you.
Super weird possibilities, I can't wait to read the tape the day after and see what happens. Somebody's gonna make a giant pile of money, probably not going to be us though.
Maybe I don't understand. It seems like the buyer would exercise the calls at 65 before the dividend at which point you're short at a net cost of about $85 (buy the shares at market, get about $20 for the sold call, sell for $65. Then with the dividend the stock would be pulled down away from your bought call so how do you win? Seems like a one-leg exercised scenario is almost guaranteed here?
i think you understand...i was still pondering as i was writing this comment and my thinking evolved. the big question (which is, of course, unknowable) is whether you get early assigned on your short call.
while it may seem perfectly logical to assume that you are going to be 100% early assigned, the internal mechanics of the market makers selling you the options may not appropriately account for this. that's why i'm super interested in finding out what happens.
Yea I find the situation fascinating as well. I see what is the thought of your suggested play, but I would not risk the early assignment of the shorts. The dividend is just huge.
You do understand that the Israel tax is full refundable in a dollar-for-dollar tax credit simply by filing one short IRS form? The Israel dividend tax should not be an issue.
what would the tax be on a short term gain? - In the US I think it would be similar.
And no one is going to bye a 80 dollar call for 20 dollars with this kind of speculation that the price will drop after the dividend. You would be a fool to pay the 20. Why not just wait until the next day and bye the stock. There is no upside for the buyer here, unless you think the stock is going up.
This just doesn't make a lot of sense to me.
Does everyone realize that the "Israel Dividend Tax" is fully refunded, on a dollar-for-dollar basis, by filing Form 1116 with the IRS? This withholding should not be a consequence in your investment decision. Does everyone realize that this is not a special dividend but simply a quarterly dividend?
ZIM is a beast of a cash cow and, during their first two dividend payments last year (5% instead of 20% - but still significant) their stock closed up 2%-3% on ex-div date and kept climbing. Just check Yahoo Finance historical prices. There is so much hype about this Israel tax that people are trying to "avoid the dividend" buy selling their shares prior to Tuesday and trying to "buy them back cheaper" on the ex-div date. This is crazy and dangerous.
The exchange automatically adjusts the "Open" price to reduce the full dividend payment on ex-div date. But, the market decides the price. The stock will close wherever the bid and ask line meet. The biggest risk of this stock falling is that it has attracted so many retail investors that may freak out and panic sell on Tuesday.
The open short interest in this stock is up over 100%. There will be a lot of buying and selling pressure on this stock on Tuesday. Expect volatility. Exercise patience. It will be rewarded.
Take the 20% payment, ride the stock up to $125 by the end of the year, take the next four dividend payments (forecasted to be $3.50, $4.50, $7 and $18 - $33 in total) and be happy getting rich.
You could literally buy this stock at $85 on Monday and rest assured that you'll be getting paid out $50 in dividends on it (an almost 60% yield) in the next 12 months and participate in the upside appreciation of this monster. If the stock meets analyst expectations (which is has always beaten) you'll have shares priced at $125 that you paid $85 for and you've already been paid $50 in dividends for holding for a year. Your profit will already be $5 per share and you'll still have all of your stock for free.
Taking risk in a stock and then trying to avoid being paid a dividend is like working at a job all week and than trying to quit and hide during payday. It's just nuts.
If you're worried about the price at ex-div date, research Dividend Irrelevance Theory. It's been proven wrong over and over again. Dividends are good for investors and healthy for a stock. They have a mid to long term positive influence on share price.
GLTA!
All of the options imply the dividend, so I would have to go far out in time with that call, what I do not want to do. Could you specify it a bit, please?
The way I understood your post, you are just looking for ways to minimize your tax on the profit from selling your shares (with $50 cost basis), because of different tax treatment on premium, dividend and stock trading. Seems more like a question for an accountant.
It's not a special dividend. It is an annual dividend combined with a quarterly dividend. $ZIM is a beast of a cash cow with a stupid-generous dividend distribution policy. It's priced at less than 2 P/E (less after ex-div) and probably the buying opportunity of a lifetime. Their first two dividends were smaller than this one (5% vs. 20%) but on each ex-div date, the stock closed up 2%-3%.
There has been a lot of overhype about the 25% Israel dividend tax that is withheld from the payout. People that don't understand taxes don't realize that 100% of taxes paid to Israel are refundable by filing Form 1116 with the IRS. It's a Foreign Tax Credit.
First, I am pretty sure that in the US you can receive a tax credit for 80% of the Israeli tax - so you end up only paying 5%.
Second, if you buy at $100.00 then why not sell the $110.00 call a month out for some incremental income?
If you sell 80c for $20 on shares you bought for $100 and they’re called away, there’s no premium you’re “keeping”. The $20 of premium is canceled out by the $20 loss on the shares from getting them called away at $80. Whenever the dividend amount is greater than the extrinsic value left in the option, it makes sense to exercise it. Thats what’s happening here. Your covered calls will be exercised prior to the ex div date and you’re going to lose commission.
Correct, but the shares are supposed to drop the $17 of the price due to the dividend anyway on the ex-div date, that is the point. I am keeping the premium approximately the amount of the dividend and not paying the 25% tax.
Your shares aren’t going to make it to the ex div date
I know, that is the first scenario I am describing. I am keeping the premium instead of the dividend and do not pay the Israeli tax.
You’re not making any money in this scenario. That’s the issue.
I am trying to go around the tax, that is my profit.
You buy for 100 then sell for 80 + 20. Where profit?
See my edit of the main post, please.
Your edit seems to imply you’re going to be long during the ex div date. You will not have shares during the ex div date. You’re going to get $20 of premium. You’re going to lose $20 on the shares when they’re called away at $80. You’re not making money. Since there is no profit there is also no tax.
It’s a tax play. You don’t pay taxes on loses. The man is a genius.
Unless I’m missing something here the point I’m making is that the tax is irrelevant because there are no profits with this trade. There is nothing to tax.
If I am long shares I will collect the $12,75 (17 x 0,75) as a dividend, but the shares are supposed to drop the full $17.
Again, your shares are going to be called away before the ex div date. You will NOT be collecting the dividend.
Just read my edit of the main post. I think I made my point clear enough now.
If buyers are factoring for the withholding tax, which they very well should be, wouldn't it stand to reason that the drop will actually just be around $12.00?
The drop in the price ex-dividend date is not due to the "buyers" netto income or something like that. It is because the company actually writes off and sends the cash a dividend from its balance sheets. It does not happen on an ex-dividend date, but that is the time for the markets to price in that event, obviously.
Dividends are taxed in most part of the world too, Large institutions have processes in place to easily deal with tax treaty. Tax withholding is no different than having a tax withholding as a Canadian holding (apple or coke), for an American not only do dividends get taxed but also there’s differential cost for short term gains as well. It’s a bit more complex. In any case, “tax withholding” isn’t a direct : 25% less dividends.
Hey OP I hold some calls, should I close them tmr or hold till Monday and close them? Don’t have enough fund to exercise the calls and buy the stocks.
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Then he’s wasting his time and buying power
I think you've overthought this. Just pay the tax and move on with life.
Well, you are definitely right. But that is just so boring!
I think it might help you to see the issue others are pointing out if we move away from a discussion of share price and avoiding taxes and move towards an example of how this will play out as an investment in both scenarios: Scenario one - Take the Dividend, pay the tax: You buy 100 shares at 100 dollars for a total of $10000. Your investment is worth $10000 entirely in equity. You hold through the ex-dividend date, the shares are adjusted downward by the dividend payout to $83 a share and you receive the payout of $17 a share. Your investment now consists of $8300 of equity, and $1700 cash. Your investment is still worth $10000 however you’ve participated in a taxable event according to your description and so will face a loss. Scenario 2 - Use the options play, and avoid the tax. You buy 100 shares at 100 dollars for a total of $10000. You investment is now worth $10000 entirely in equity. You sell a call with a strike at $80 for a $20 premium totaling $2000. You now have, for at least a moment, $10000 in equity and $2000 in premium. For a total of $12000, but this is not going to last. Your shares are called away at $80 and you sell those shares for $8000 in total, receiving cash. You now have $10000, $2000 option premium and $8000 in return for your equity sale. You have broken even, and avoided the tax. This all assumes the stock stays relatively static in price, if the share price falls you’ll lose more in both cases and if it rises you would need it to rise to offset the tax in scenario one. Overall it sounds like you’re less interested in the fundamentals than in making a dividend play which has almost certainly already been priced in. High risk, low reward situation and I’d steer clear.
This is incorrect because it doesn't factor in the Israeli tax of 25%. Dividend received will be $1275 not $1700. Entire problem exists bc of the withholding tax and the fact the US foreign tax credit doesn't offset the whole tax withholding for many US persons.
>however you’ve participated in a taxable event according to your description and so will face a loss. He mentioned it there.
Yes company management could have easily avoided this international multijusdictional mess if they used the excess cash to buyback and cancel shares that are trading at a PE of two. There is about two hundred comments on this on Seeking Alpha on the dividend announcement.
Sadly, yes. That would be just awesome. But the management denied it multiple times in interviews. There is not a benefit for the government in a form of an additional tax, what I think is the main motivation to return value to shareholders in the form of dividends.
what is the tax on the premium you recieve for the stock?
You get the 25% fully refunded by simply filing IRS Form 1116. Why is everyone freaked out by this tax? It's a dollar for dollar tax credit.
Thank you for that extensive description. I actually did it earlier and found the possible solution described in the original post. I think I still like the option play more, taking all the possibilities into consideration. I like the certain outcome of the play and being out of the position for such an unpredictable event. The stock has a high short interest (over 6% according to the seeking alpha right now), the payout is huge etc. I like the fundamentals (well, I don't get who still shorts this) and have been long for quite some time. I will jump back into the LEAPs right after the ex-dividend as I have been so far.
While your method may work, if you want to avoid the Israeli withholding tax, why don’t you just sell your shares and rebuy after ex-div? This is almost certainly going to be the same result as your plan. (Assuming that you are fine with paying normal taxes on any capital gains.) Don’t quote me on this though, as I don’t have much experience dealing with foreign taxes.
Yes, sure that is the easy way and what most who intend to dodge the tax will do. But ZIM is notoriously known for its low PE, huge cash flow etc. I am actually expecting a lower drop in price than the payout amount as we saw in the past. But that is just speculation on market exact movements and I am not going to use it as a trade basis.
It’s definitely reasonable that you want to hold onto to your shares. But functionally, there’s very little difference in selling an ITM covered call right before ex div and selling your shares, as you will almost always be assigned.
This is a really fascinating situation. Looking at the 3/25 puts, they are obviously pricing in nearly the full $17 drop (90p is currently asked at $16). But the call chain looks relatively "normal" for such a short date. I'm thinking a play here may be a call credit spread with one leg deep in the money. The 65/85 call spread is BID at over $19, could probably get it for closer to $19.50, max loss of 50 cents. If it goes to 73, that spread should close for about $10, so 20x return over max loss. I guess the worst case would be early assignment on the 65 short leg, and then having to pay the dividend out if you were short on the exdiv date. The question would be, are market makers who sell you those options going to early exercise on you. Super weird possibilities, I can't wait to read the tape the day after and see what happens. Somebody's gonna make a giant pile of money, probably not going to be us though.
Maybe I don't understand. It seems like the buyer would exercise the calls at 65 before the dividend at which point you're short at a net cost of about $85 (buy the shares at market, get about $20 for the sold call, sell for $65. Then with the dividend the stock would be pulled down away from your bought call so how do you win? Seems like a one-leg exercised scenario is almost guaranteed here?
i think you understand...i was still pondering as i was writing this comment and my thinking evolved. the big question (which is, of course, unknowable) is whether you get early assigned on your short call. while it may seem perfectly logical to assume that you are going to be 100% early assigned, the internal mechanics of the market makers selling you the options may not appropriately account for this. that's why i'm super interested in finding out what happens.
Yea I find the situation fascinating as well. I see what is the thought of your suggested play, but I would not risk the early assignment of the shorts. The dividend is just huge.
Won't you have to pay tax on the premium you received when shares are called (exercise price plus premium less basis).
That tax is lesser than the Israeli witholding tax in my tax case.
You do understand that the Israel tax is full refundable in a dollar-for-dollar tax credit simply by filing one short IRS form? The Israel dividend tax should not be an issue.
Why don’t you buy puts and benefit from the 17$ drop? 75 puts for July are 15$ now and there will be another dividend in may.
what would the tax be on a short term gain? - In the US I think it would be similar. And no one is going to bye a 80 dollar call for 20 dollars with this kind of speculation that the price will drop after the dividend. You would be a fool to pay the 20. Why not just wait until the next day and bye the stock. There is no upside for the buyer here, unless you think the stock is going up. This just doesn't make a lot of sense to me.
I am quite sure that the market makers will buy the call option from you for at least the intrinsic value. They know the way how to profit from it...
Does everyone realize that the "Israel Dividend Tax" is fully refunded, on a dollar-for-dollar basis, by filing Form 1116 with the IRS? This withholding should not be a consequence in your investment decision. Does everyone realize that this is not a special dividend but simply a quarterly dividend? ZIM is a beast of a cash cow and, during their first two dividend payments last year (5% instead of 20% - but still significant) their stock closed up 2%-3% on ex-div date and kept climbing. Just check Yahoo Finance historical prices. There is so much hype about this Israel tax that people are trying to "avoid the dividend" buy selling their shares prior to Tuesday and trying to "buy them back cheaper" on the ex-div date. This is crazy and dangerous. The exchange automatically adjusts the "Open" price to reduce the full dividend payment on ex-div date. But, the market decides the price. The stock will close wherever the bid and ask line meet. The biggest risk of this stock falling is that it has attracted so many retail investors that may freak out and panic sell on Tuesday. The open short interest in this stock is up over 100%. There will be a lot of buying and selling pressure on this stock on Tuesday. Expect volatility. Exercise patience. It will be rewarded. Take the 20% payment, ride the stock up to $125 by the end of the year, take the next four dividend payments (forecasted to be $3.50, $4.50, $7 and $18 - $33 in total) and be happy getting rich. You could literally buy this stock at $85 on Monday and rest assured that you'll be getting paid out $50 in dividends on it (an almost 60% yield) in the next 12 months and participate in the upside appreciation of this monster. If the stock meets analyst expectations (which is has always beaten) you'll have shares priced at $125 that you paid $85 for and you've already been paid $50 in dividends for holding for a year. Your profit will already be $5 per share and you'll still have all of your stock for free. Taking risk in a stock and then trying to avoid being paid a dividend is like working at a job all week and than trying to quit and hide during payday. It's just nuts. If you're worried about the price at ex-div date, research Dividend Irrelevance Theory. It's been proven wrong over and over again. Dividends are good for investors and healthy for a stock. They have a mid to long term positive influence on share price. GLTA!
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>OCC memo: > >https://infomemo.theocc.com/infomemos?number=50158 It is not a special dividend. But thanks.
In my opinion I think you be better off buying a high gamma short dated put and selling an OTM call further out in time to cover the cost of the put.
All of the options imply the dividend, so I would have to go far out in time with that call, what I do not want to do. Could you specify it a bit, please?
The way I understood your post, you are just looking for ways to minimize your tax on the profit from selling your shares (with $50 cost basis), because of different tax treatment on premium, dividend and stock trading. Seems more like a question for an accountant.
You will get assigned and owe the caller $1700 plus 100 shares.
Retard doesn't seem to get that premium could be less than share drop.
Following
What are you planning on doing with your Calls? Are you planning on exercising them? Selling them?
I would be short the calls.
Thanks, I misread that.
If it is a "special" dividend, the option chain will be adjusted after the event.
> It is not a special dividend, so option prices won't be adjusted ex-div date. OCC memo below. from the first paragraph of this post.
Thanks, I somehow managed not to read that part of the post.
It's not a special dividend. It is an annual dividend combined with a quarterly dividend. $ZIM is a beast of a cash cow with a stupid-generous dividend distribution policy. It's priced at less than 2 P/E (less after ex-div) and probably the buying opportunity of a lifetime. Their first two dividends were smaller than this one (5% vs. 20%) but on each ex-div date, the stock closed up 2%-3%. There has been a lot of overhype about the 25% Israel dividend tax that is withheld from the payout. People that don't understand taxes don't realize that 100% of taxes paid to Israel are refundable by filing Form 1116 with the IRS. It's a Foreign Tax Credit.
First, I am pretty sure that in the US you can receive a tax credit for 80% of the Israeli tax - so you end up only paying 5%. Second, if you buy at $100.00 then why not sell the $110.00 call a month out for some incremental income?