The Arbitrage Opportunity on Movado Group (MOV) Stock
Typically, I avoid discussing strategies involving options due to the significant losses that can occur if the market moves against you. However, when the opportunity has a shallow risk profile, and the potential reward seems attractive, it warrants consideration. The current situation with Movado Group (MOV) is an arbitrage opportunity for investors.
|Source: The Watch Specialist Website|
MOV recently announced in-line earnings and declared a special dividend of $1 per share, along with its regular quarterly dividend of $0.35. The ex-dividend date is April 4, 2023, and the dividend payment date will be April 19, 2023. Usually, such an announcement would lead to a rise in the share price. However, Movado's lackluster guidance for the next quarter caused a 15% drop in its share price, presenting an intriguing entry point.
As an illiquid small-cap stock, MOV's average daily volume is only 163,000 shares over the past year, less than the 500,000 share threshold for active trading. However, despite the typically wide bid-ask spreads, its options chain still facilitates options trading. The option premium plus strike price closely matches the underlying share price, enabling this strategy.
By purchasing MOV shares before the ex-date and selling call options against the position, investors can realize the dividends while generating income and minimizing capital exposure for ~3 weeks. Specifically:
- Buy 100 MOV shares at the current market price.
- Sell one call option at a lower strike than the current price, expiring April 21, 2023, against the 100 MOV shares.
Exercising the call option will zero out the MOV position, likely resulting in a slight gain or loss. However, purchasing before the ex-date will qualify you to receive the dividend per share, which will be at least US$0.90 per share or ~3% at the current $28 share price.
A shallow risk profile does not mean this strategy has no risk. The primary risk is that MOV's share price could drop substantially below the strike price. However, as an illiquid stock, the downside is limited. Investors can also mitigate risk by selling call options with a lower strike price to ensure the options will exercise even if the share price drops significantly. Selling lower-strike call options also generates higher premiums upfront, providing more capital to work with.
In summary, this strategy allows you to take advantage of a low-risk arbitrage opportunity in the options market while benefiting from the special and regular dividends MOV offers. Combining these factors creates a compelling short-term investment opportunity that can yield favorable returns with minimal risk.
I will be writing more about MOV.
Interesting. however, you also need to factor in US dividend withholding tax of 30%ReplyDelete
The actual dividend was US$1.35. The remaining return has been factored in.
Thanks for sharing. Also since exD is tmr, another way might be to sell call today and cover back tmr. Potentially the theroetical share price drop of $1.35 is even higher, though of cos share price movements is not certain.Delete