The call spread strategy funded by a put is popular!

According to Antoine Deix, Dividend Strategist at BNP Paribas, dividend derivatives are greatly democratized since futures and options were listed respectively in 2008 and 2010. These products now cover all types of investors ...

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Dividend strategies, reserved a few time ago to a niche of sophisticated investors today concern all types of investors. According to Antoine Deix, Dividend Strategist at BNP Paribas, dividend derivatives are greatly democratized since futures and options were listed respectively in 2008 and 2010.

For all that strategies vary depending on the risk profile of the investor. "Most investors take long positions on short to medium term maturities to take advantage of the convergence of implicit prices to their fundamental value. These positions are through futures or call spread; the call spread Strategy funded by a put is quite popular " says Antoine Deix.

Currently, the Eurostoxx 50 dividends curve still shows a negative implied growth. Spreads between two maturities allow taking a position on this implied growth.
Antoine Deix, Dividend Strategist, BNPP

Hedges funds and sophisticated investors also set up "credit arbitrage versus Dividends", being long or short Credit indices versus dividend futures or swaps. "Credit and volatility are intuitive hedges, dividends being one of the first adjustment variables of a company in times of stress," says Antoine Deix.

In July this year, implied credit spreads for dividend swaps (maturing in December 2015) showed such a spread of 300 bps over the iTraxx Crossover. If a higher spread on dividend swaps seems justified (the company cutting its dividend before going bankrupt), the implied probabilities of default nevertheless indicated that credit was so much more expensive than the dividend swaps. One of the strategies recommended by BNPP was then buying a swaption call on a dividend swap financed by the sale of a call on a CDS to capture excess spread swaps implied by the dividend swap.

These new strategies and these new investors contribute to the overall growth of the dividend market.

These offer a unique aspect of convergence towards a settlement price (dividends announced by companies) independent of flows and market sentiments. They allow an investment in a fundamental view for a single maturity (the result of a calendar year).

"This feature and attractive risk premium levels have attracted many investors. Today dividends are an asset class in their own right and their attractiveness remains intact " concludes Antoine Deix.

Paul Monthe , February 2014

Article also available in : English EN | français FR

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