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+Chapter 27: Arbitrage 425 
+be able to use another in-the-money put. Suppose the XYZ July 80 put could be sold 
+at 22. This would be the same as buying the stock at 58, because if the put were 
+assigned, the arbitrageur would be forced to buy stock at 80 - the striking price - but 
+his net cost would be 80 minus the 22 points he received from the sale of the put, for 
+a net cost of 58. Again, the arbitrageur is able to use the sale of a deeply in-the-money 
+option as a substitute for the stock trade. 
+The examples above assumed that the arbitrageur sold a deeper in-the-money 
+option at parity. In actual practice, if an in-the-money option is at a discount, an even 
+deeper in-the-money option will generally be at a discount as well. The arbitrageur 
+would normally try to sell, at parity, an option that was less deeply in-the-money than 
+the one he is discounting. 
+In a broader sense, this technique is applicable to any arbitrage that involves a 
+stock trade as part of the arbitrage, except when the dividend in the stock itself is 
+important. Thus, if the arbitrageur is having trouble buying or selling stock as part of 
+his arbitrage, he can always check whether there is an in-the-money option that could 
+be sold to produce a position equivalent to the stock position. 
+DIVIDEND ARBITRAGE 
+Dividend arbitrage is actually quite similar to the basic put arbitrage. The trader can 
+lock in profits by buying both the stock and the put, then waiting to collect the divi­
+dend on the underlying stock before exercising his put. In theory, on the day before 
+a stock goes ex-dividend, all puts should have a time value premium at least as large 
+as the dividend amount. This is true even for deeply in-the-money puts. 
+Example: XYZ closes at 45 and is going to go ex-dividend by $1 tomorrow. Then a 
+put with striking price of 50 should sell for at least 6 points ( the in-the-money amount 
+plus the amount of the dividend), because the stock will go ex-dividend and is expect­
+ed to open at 44, six points in-the-money. 
+If, however, the put' s time value premium should be less than the amount of the 
+dividend, the arbitrageur can take a riskless position. Suppose the XYZ July 50 put is 
+selling for 5¾, with the stock at 45 and about to go ex-dividend by $1. The arbi­
+trageur can take the following steps: 
+1. Buy the put at 5¼. 
+2. Buy the stock at 45. 
+3. Hold the put and stock until the stock goes ex-dividend (1 point in this case). 
+4. Exercise the put to sell the stock at 50.