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+Chapter 27: Arbitrage 447 
+However, when XYZ rallies to 60, his profit increases. He would still make the 
+$1,600 on LMN as it rose from 22 to 30, but now would only lose $550 on the XYZ 
+put - a total profit of $1,050 as compared to $600 with an all-stock position. 
+The disadvantage to substituting long puts for short stock is that the arbitrageur 
+does not receive credit for the short sale and, therefore, does not earn money at the 
+carrying rate. This might not be as large a disadvantage as it initially seems, however, 
+since it is often the case that it is very expensive - even impossible - to borrow the 
+acquiring stock in order to short it. If the stock borrow costs are very large or if no 
+stock can be located for borrowing, the purchase of an in-the-money put is a viable 
+alternative. The purchase of an in-the-money put is preferable to an at- or out-of-the­
+money put, because the amount of time value premium paid for the latter would take 
+too much of the profitability away from the arbitrage if XYZ stayed unchanged or 
+declined. This strategy may also save money if the merger falls apart and XYZ rises. 
+The loss on the long put may well be less than the loss would be on short XYZ stock. 
+Note also that one could sell the XYZ July 55 call short as well as buy the put. 
+This would, of course, be synthetic short stock and is a pure substitute for shorting 
+the stock. The use of this synthetic short is recommended only when the arbitrageur 
+cannot borrow the acquiring stock. If this is his purpose, he should use the in-the­
+money put and out-of-the-money call, since if he were assigned on the call, he could 
+not borrow the stock to deliver it as a short sale. The use of an out-of-the-money call 
+lessens the chance of eventual assignment. 
+The companion strategy is to buy an in-the-money call instead of buying the 
+company being acquired (LMN). This has advantages if the stock falls too far, either 
+because the merger falls apart or because the stocks in the merger decline too far. 
+Additionally, the cost of carrying the long LMN stock is eliminated, although that is 
+generally built into the cost of the long calls. The larger amount of time value pre­
+mium in calls as compared to puts makes this strategy often less attractive than that 
+of buying the puts as a substitute for the short sale. 
+One might also consider selling options instead of buying them. Generally this 
+is an inferior strategy, but in certain instances it makes sense. The reason that option 
+sales are inferior is that they do not limit one's risk in the risk arbitrage, but they cut 
+off the profit. For example, if one sells puts on the company being acquired (LMN), 
+he has a bullish situation. However, if the company being acquired (XYZ) rallies too 
+far, there will be a loss, because the short puts will stop making money as soon as 
+LMN rises through the strike. This is especially disconcerting if a takeover bidding 
+war should develop for LMN. The arbitrageur who is long LMN will participate nice­
+ly as LMN rises heavily in price during the bidding war. However, the put seller will 
+not participate to nearly the same extent.