444 Part IV: Additional Considerations 
could be bought - short stock and long 2 calls. Inversely, a listed straddle could be 
bought against a ratio write - long stock and short 2 calls. The only time the arbi­
trageur should even consider anything like this is when there are more sizable mar­
kets in certain of the puts and calls than there are in others. If this were the case, he 
might be able to take an ordinary box spread, conversion, or reversal and add to it, 
keeping the arbitrage intact by ensuring that he is, in fact, buying and selling equiv­
alent positions. 
THE EFFECTS OF ARBITRAGE 
The arbitrage process serves a useful purpose in the listed options market, because it 
may provide a secondary market where one might not otherwise exist. Normally, 
public interest in an in-the-money option dwindles as the option becomes deeply in­
the-money or when the time remaining until expiration is very short. There would be 
few public buyers of these options. In fact, public selling pressure might increase, 
because the public would rather liquidate in-the-money options held long than exer­
cise them. The few public buyers of such options might be writers who are closing 
out. However, if the writer is covered, especially where call options are concerned, 
he might decide to be assigned rather than close out his option. This means that the 
public seller is creating a rather larger supply that is not offset by a public demand. 
The market created by the arbitrageur, especially in the basic put or call arbitrage, 
essentially creates the demand. Without these arbitrageurs, there could conceivably 
be no buyers at all for those options that are short-lived and in-the-money, after pub­
lic writers have finished closing out their positions. 
Equivalence arbitrage - conversion, reversals, and box spreads - helps to keep 
the relative prices of puts and calls in line with each other and with the underlying 
stock price. This creates a more efficient and rational market for the public to oper­
ate in. The arbitrageur would help eliminate, for example, the case in which a public 
customer buys a call, sees the stock go up, but cannot find anyone to sell his call to 
at higher prices. If the call were too cheap, arbitrageurs would do reversals, which 
involve call purchases, and would therefore provide a market to sell into. 
Questions have been raised as to whether option trading affects stock prices, 
especially at or just before an expiration. If the amount of arbitrage in a certain issue 
becomes very large, it could appear to temporarily affect the price of the stock itself. 
For example, take the call arbitrage. This involves the sale of stock in the market. The 
corresponding stock purchase, via the call exercise, is not executed on the exchange. 
Thus, as far as the stock market is concerned, there may appear to be an inordinate 
amount of selling in the stock. If large numbers of basic call arbitrages are taking 
place, they might thus hold the price of the stock down until the calls expire.