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+Chapter 27: Arbitrage 423 
+BASIC PUT AND CALL ARBITRAGE ("DISCOUNTING") 
+The basic call and the basic put arbitrages are two of the simpler forms of option arbi­
+trage. In these situations, the arbitrageur attempts to buy the option at a discount 
+while simultaneously taking an opposite position in the underlying stock. He can then 
+exercise his option immediately and make a profit equal to the amount of the discount. 
+The basic call arbitrage is described first. This was also outlined in Chapter 1, 
+under the section on anticipating exercise. 
+Example: XYZ is trading at 58 and the XYZ July 50 call is trading at 7¾. The call is 
+actually at a discount from parity of ¼ point. Discount options generally either are 
+quite deeply in-the-money or have only a short time remaining until expiration, or 
+both. The call arbitrage would be constructed by: 
+1. buying the call at 7¾; 
+2. selling the stock at 58; 
+3. exercising the call to buy the stock at 50. 
+The arbitrageur would make 8 points of profit from the stock, having sold it at 58 and 
+bought it back at 50 via the option exercise. He loses the 7¾ points that he paid for 
+the call option, but this still leaves him with an overall profit of¼ point. Since he is 
+a member of the exchange, or is trading the seat of an exchange member, the arbi­
+trageur pays only a small charge to transact the trades. 
+In reality, the stock is not sold short per se, even though it is sold before it is 
+bought. Rather, the position is designated, at the time of its inception, as an "irrevo­
+cable exercise." The arbitrageur is promising to exercise the call. As a result, no 
+uptick is required to sell the stock. 
+The main goal in the call arbitrage is to be able to buy the call at a discount from 
+the price at which the stock is sold. The differential is the profit potential of the arbi­
+trage. The basic put arbitrage is quite similar to the call arbitrage. Again, the arbi­
+trageur is looking to buy the put option at a discount from parity. The put arbitrage 
+is completed with a stock purchase and option exercise. 
+Example: XYZ is at 58 and the XYZ July 70 put is at 11 ¾. With the put at ¼ discount 
+from parity, the arbitrageur might take the following action: 
+1. Buy put at 11 ¾. 
+2. Buy stock at 58. 
+3. Exercise put to sell stock at 70.