Adjusting for Dividends

Because a dividend is treated as a return on equity, the markets adjust for this distribution. If we are to maintain your preferred trailing stop percentage, the entry price and historical high prices must be adjusted because it was a return on equity.

By default, TradeStops adjusts for dividends. This is what is shown on the “Positions & Alerts” page in the “Adj. Entry Price” column. This is important, as it may affect when you are stopped out if you have held positions for a long time.

Entry Price will be adjusted only if “adjust alerts by dividends” is set to “Yes.”

If “No” is selected, no adjustment is made. The adjusted entry price column would be the same as the entry price column.

 

In TradeStops, we employ the use of an adjustment factor, or multiplier. Dividend multipliers are calculated based on the dividend as a percentage of the price primarily to avoid negative historical pricing (which would occur eventually if the amount of each dividend was simply subtracted from the entry price over time).

For cash dividends, we use the following adjustment method:

LONGS:

Adj. Entry Price= Entry Price * Dividend Adjustment Factor

Dividend Adjustment Factor=(1-Dividends Value/Close Price on the date prior to ex-dividend date) * ( Previous Dividends Adjustment Factor)

Example: Entry date=02/01/2015, Entry Price=$100, Shares=10, Dividends were issued:

1) $2/share on 03/01/2015, Market Price on the date prior to ex-date =$200

2) $1/share on 01/01/2015, Market Price on the date prior to ex-date=$100

Example Calculations:

Dividend Adjustment Factor=(1-$2/$200)*(1-$1/$100)=0.99*0.99=0.9801

Entry Price Adj=$100*0.9801=$98.01

SHORTS:

Entry Price for short positions is not adjusted by Cash Dividends.

Entry Price Adj= Entry Price

Example: Entry date=01/01/2015, Entry Price=$100, Shares=10, Dividends – $1/share on 06/01/2015

Entry Price Adj=Entry Price=$100

 

Related Topics:

Back to Knowledge Base