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+402 Part Ill: Put Option Strategies 
+is not the simple discount arbitrage that was discussed in Chapter l when this topic 
+was covered. Rather, it is a more complicated form that is discussed in greater detail 
+in Chapter 28. Suffice it to say that if the dividend is larger than the interest that can 
+be earned from a credit balance equal to the striking price, then the time value pre­
+mium will disappear from the call. 
+Example: XYZ is a $30 stock and about to go ex-dividend 50 cents. The prevailing 
+short-term interest rate is 5% and there are LEAPS with a striking price of 20. 
+A 50-cent quarterly dividend on a striking price of 20 is an annual dividend rate 
+(on the strike) of 10%. Since short-term rates are much lower than that, arbitrageurs 
+economically cannot pay out 10% for dividends and earn 5% for their credit balances. 
+In this situation, the LEAPS call would lose its time value premium and would 
+be a candidate for early exercise when the stock goes ex-dividend. 
+In actual practice, the situation is more complicated than this, because the price 
+of the puts comes into play; but this example shows the general reasoning that the 
+arbitrageur must go through. 
+Certain arbitrageurs construct positions that allow them to earn interest on a 
+credit balance equal to the striking price of the call. This position involves being short 
+the underlying stock and being long the call. Thus, when the stock goes ex-dividend, 
+the arbitrageur will owe the dividend. If, however, the amount of the dividend is 
+more than he vvill earn in interest from his credit balance, he will merely exercise his 
+call to cover his short stock. This action will prevent him from having to pay out the 
+dividend. 
+The arbitrageur's exercise of the call means that someone is going to be 
+assigned. If you are a writer of the call, it could be you. It is not important to under­
+stand the arbitrage completely; its effect will be reflected in the marketplace in the 
+form of a call trading at parity or a discount. Thus, even a LEAPS call with a sub­
+stantial anwunt of time rernaining may be assigned if it is trading at parity. 
+STRADDLE SELLING 
+Straddle selling is equivalent to ratio writing and is a strategy whereby one attempts 
+to sell ( overpriced) options in order to produce a range of stock prices within which 
+the option seller can profit. The strategy often involves follow-up action as the stock 
+moves around, and the strategist feels that he must adjust his position in order to pre­
+vent large losses. LEAPS puts and calls might be used for this strategy. However, 
+their long-term nature is often not conducive to the aims of straddle selling. 
+First, consider the effect of time decay. One might normally sell a three-month 
+straddle. If the stock "behaves" and is relatively unchanged after two months have