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.