From the May 01, 2011 issue of Futures Magazine • Subscribe!

Dividend options and futures

The same procedure can be used for the EuroStoxx 50, as well, to compare implied dividend levels vs. the S&P 500 for different maturities. It turns out that expected dividend payments implied on listed EuroStoxx 50 equity options are quite low and even falling for longer dated maturities, indicating negative dividend growth for the years to come (see "Slippery slope").

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There is no economic or financial argument that would support these falling dividend levels over a longer time horizon. Some people interpret this phenomenon as a structural inefficiency in the derivatives market. According to some analysts, this unusual shape of the dividend curve is explained by an overhang of bullish structured equity products in the European markets.

Whatever the reason, the gap between higher implied dividend increases for the S&P 500 vs. flat or even falling changes of dividend payments for the EuroStoxx 50 seems to offer profit potential to investors. Dividend payments, however, are highly correlated with stock market movements as displayed in "Index vs. dividends" (see below), which plots the S&P 500 spot vs. 12-month realized dividend levels, making a pure dividend long- or short-play risky.

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