Appendix C: Put-Call Parity   • 289
traded on the New Y ork Stock Exchange and the price of IBM traded in 
Philadelphia) but are not. An arbitrageur, once he or she spots the small 
difference, sells the more expensive thing and buys the less expensive one 
and makes a profit without accepting any risk. 
Because we are going to investigate dividend arbitrage, even a big-
picture guy like me has to get down in the weeds because the differences we 
are going to try to spot are small ones. The weeds into which we are wading 
are mathematical ones, I’m afraid, but never fear—we’ll use nothing more 
than a little algebra. We’ll use these variables in our discussion:
K = strike price
C
K = call option struck at K
PK = put option struck at K
Int = interest on a risk-free instrument 
Div = dividend payment
S = stock price
Because we are talking about arbitrage, it makes sense that we are 
going to look at two things, the value of which should be the same. We 
are going to take a detailed look at the preceding image, which means that 
we are going to compare a position composed of options with a position 
composed of stock.
Let’s say that the stock at which we were looking to build a position is 
trading at $50 per share and that options on this stock expire in exactly one 
year. Further, let’s say that this stock is expected to yield $0.25 in dividends 
and that the company will pay these dividends the same day that the op-
tions expire.
Let’s compare the two positions in the same way as we did in the 
preceding big-picture image. As we saw in that image, a long call and a 
short put are the same as a stock. Mathematically, we would express this 
as follows:
C
K − PK = SK
Although this is simple and we agreed that it’s about right, it is not 
technically so.
The preceding equation is not technically right because we know that 
a stock is an unlevered instrument and that options are levered ones. In the