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+Chapter 27: Arbitrage 453 
+Before giving an example of that arbitrage, a word about short tendering is in 
+order. Short tendering is against the law. It comes about when one tenders stock into 
+a tender offer when he does not really own that stock. There are complex definitions 
+regarding what constitutes ownership of stock during a tender offer. One must be net 
+long all the stock that he tenders on the day the tender offer expires. Thus, he can­
+not tender the stock on the day before the offer expires, and then short the stock on 
+the next day ( even if he could borrow the stock). In addition, one must subtract the 
+number of shares covered by certain calls written against his position: Any calls with 
+a strike price less than the tender off er price must be subtracted. Thus, if he is long 
+1,000 shares and has written 10 in-the-money calls, he cannot tender any shares. The 
+novice and experienced investor alike must be aware of these definitions and should 
+not violate the short tender rules. 
+Let us now look at an arbitrage consisting of buying stock and buying the expen­
+sive puts. 
+Example: XYZ is at 52. As before, there is a tender offer for half the stock at 70, with 
+no plans for the remainder. The July 55 puts sell for 15, and the July 50 puts sell for 
+10. It is common that both puts would be predicting the same price in the after-mar­
+ket: 40. 
+If one buys 200 shares ofXYZ at 52 and buys one July 50 put at 10, he has a locked­
+in profit as long as the tender offer is completed. He only buys one put because he 
+is assuming that 100 shares will be accepted by the company and only 100 shares will 
+be returned to him. Once the 100 shares have been returned, he can exercise the put 
+to close out his position. 
+The following table summarizes these results: 
+Initial purchase 
+Buy 200 XYZ at 52 
+Buy 1 July 50 put at 10 
+Total Cost 
+Closing sale 
+Sell 1 00 XYZ at 70 via tender 
+Sell 1 00 XYZ at 50 via put exercise 
+Total proceeds 
+Total profit: $600 
+$10,400 debit 
+1,000 debit 
+$11 ,400 debit 
+7,000 credit 
+5,000 credit 
+$12,000 credit 
+This strategy eliminates the risk ofloss ifXYZ opens substantially below 40 after 
+the tender offer. The downside price is locked in by the puts.