Dividend Gap and Investment Strategies

Is It Worth Playing the Dividend Gap Down?

Introduction

Before the ex-dividend date, the stocks of major issuers adjust by the amount of the declared dividend, creating a price gap known as a dividend gap. Whether to open a short position in anticipation of a price decline depends on the gap's mechanics, market conditions, and risk management. Analyzing fall statistics, liquidity, commissions, and taxation helps traders make informed decisions.

The dividend gap reflects an instantaneous reevaluation of the asset by the market, and a trader skilled in navigating this phenomenon gains an additional tool—the ability to profit from price declines rather than relying solely on price increases.

It is essential to recognize that a gap is not merely a decrease in price equal to the dividend but rather a complex market behavior dependent on sentiments, technical factors, and fundamental conditions.

1. Short Strategy on the Dividend Gap

1.1 Mechanics of Short Selling

Short selling before the ex-dividend date involves borrowing shares from a broker and selling them at the price prior to the dividend payout. After the ex-date, the shares trade without the dividend coupon, and their price opens lower by the amount of the dividend, providing the trader the opportunity to close the short profitably.

It is crucial to organize the process correctly: arrange the loan, place a sell order, and monitor execution to minimize slippage and commission costs.

1.2 Entry Signals

Key signals confirming the feasibility of shorting before the ex-date include:

• Official announcement of the ex-date in the corporate calendar.
• Dividend yield above 3-5%, historically leading to noticeable gaps.
• Presence of similar gaps on previous ex-dates.
• Technical indicators: reduced volume during accumulation, weak momentum following the news release.

1.3 Short vs Buy-and-Hold

The short strategy differs from the classic buy-and-hold approach through the ex-dividend date in that the trader locks in profits from falling prices rather than from receiving dividends. When comparing, it is important to consider:

• The spread and commissions: shorting involves two trades (loan + cover), while buy-and-hold involves one purchase and retention.
• Price recovery risk: in a buy-and-hold strategy, prices may recover gradually, whereas in short selling, a trader must close the position in a timely manner.
• Tax implications: dividends are taxed at a 13% personal income tax rate, and profits from short selling are also taxable.

2. Price Decline and Gap Filling Analysis

2.1 Decline Statistics

According to research from Moscow Exchange, the average decline in the prices of major issuers on the ex-dividend date is approximately 85% of the declared dividend. In numbers, this looks as follows:

This confirms that the gap often does not fully correspond to the dividend, and traders must rely on historical data for specific issuers.

2.2 Gap Filling

Gap filling refers to the price returning to the range of missed values. According to statistics:

• 60% of gaps fill within 3-5 trading days.
• 85% fill within 10 days.
• 15% require more than two weeks for complete restoration.

Traders use this data to determine the holding period for the short position: to lock in profits at the first sign of a gap fill or to hold until full recovery.

3. Risk Management and Leverage

3.1 Optimal Leverage

Margin leverage can enhance potential profits but also increases the risk of a margin call in the event of unexpected price movements. It is advisable to use moderate leverage of 1:2–1:3:

• 1:2—suitable for conservative traders.
• 1:3—for experienced traders who can control the position.

Leverage of 1:5 or higher is recommended only with a stringent risk management system and adequate margin reserves.

3.2 Stop-Loss and Take-Profit

Effective levels for order placement are:

• Stop-Loss—set above the opening price on the ex-date by 50% of the anticipated gap.
• Take-Profit—upon reaching 80-90% of the gap fill or upon the formation of strong counter-trend patterns.

This approach allows for minimizing losses during a sudden recovery while capturing the bulk of profits.

3.3 Diversification

It is recommended to short multiple stocks with different ex-dates to decrease correlated risks. Combining short and dividend capture strategies on different assets smooths the portfolio's performance and reduces the impact of unpredictable gaps.

4. Liquidity and Spread on Ex-Dates

4.1 Volume and Market Depth

On the ex-dividend date, the average trading volume decreases by 15-25%, and the bid-ask spread widens by twice. The market usually revives before the cutoff date, returning liquidity in the latter half of the session. This effect can be seen in the following examples:

• Gazprom: volume fell by 20% in the morning, recovering by midday.
• Sberbank: spread increased from 5 kopecks to 15 kopecks.

4.2 Avoiding Slippage

To minimize slippage, the following tactics can be employed:

• placing limit orders within the order book;
• entering during the second half of the first session;
• splitting volume into several orders;
• monitoring market depth and market maker orders.

5. Costs: Commissions and Taxes

5.1 Brokerage Fees

Commissions from Russian brokers range from 0.02-0.05% of turnover, while the spread on the ex-date can reach 0.1-0.3%. Overall costs for short selling (including two transactions) can total between 0.15-0.4% of the position size.

5.2 Tax on Short Selling

Profits from short capture are subject to a personal income tax at a rate of 13%. Losses from short selling can be used to reduce the taxable base, which is crucial in active arbitrage scenarios.

6. Timing of Entry and Exit

6.1 Optimal Timing for Entry

The best timeframes for opening a short position are:

• 1-2 days before the ex-date—to avoid morning spread;
• at the opening on the ex-date—to capture the maximum gap;
• in the second half of the first session—when liquidity begins to recover.

6.2 Closing the Position

Conditions for closing the short include:

• achievement of gap fill (80-90%);
• appearance of strong counter-trend patterns (pin-bar, engulfing);
• reactions to fundamental news and trend changes.

7. Cases and Examples

7.1 Gazprom

A short was opened at 240 ₽ before the ex-date on 20.08.2025, covered at 235 ₽ at the opening. After a retest to 238 ₽, an additional profit was secured. In total, the net profit came to 3 ₽ per share after commissions.

7.2 Sberbank

On 14.09, a short was bought at 300 ₽, covered at 297 ₽ after the ex-date. The gap fill was awaited until 299 ₽ over three days, allowing for an additional profit of 2 ₽.

7.3 Combined Approach

The arbitrage of dividends on one stock and shorting another on the ex-date helps mitigate the unpredictability of individual gaps while providing a more stable income.

7.4 Additional Examples

— Lukoil: on 10.06.2025, a dividend of 50 ₽ with a gap of -45 ₽ and a quick gap fill within two days.
— NOVATEK: on 12.07.2025, a dividend of 20 ₽ with a gap of -17 ₽ and complete gap filling within a week.

Conclusion

Shorting dividend gaps is an effective strategy for experienced traders that combines technical and fundamental analysis, risk management, and cost considerations. Optimal leverage, precise timing of entry and exit, as well as diversification and the combination of approaches help mitigate risks while enhancing income stability. Regular analysis of historical gaps, maintaining a trading journal, and adapting strategies to current market conditions provide a foundation for long-term success.