Chapter 27: Arbitrage 445 
The put arbitrage has an opposite effect. This arbitrage involves buying stock in 
the market. The offsetting stock sale via the put exercise takes place off the exchange. 
If a large amount of put arbitrage is being done, there may appear to be an inordi­
nate amount of buying in the stock. Such action might temporarily hold the stock 
price up. 
In a vast majority of cases, however, the arbitrage has no visible effect on the 
underlying stock price, because the amount of arbitrage being done is very small in 
comparison to the total number of trades in a given stock. Even if the open interest 
in a particular option is large, allowing for plenty of option volume by the arbi­
trageurs, the actual act of doing the arbitrage will force the prices of the stock and 
option back into line, thus destroying the arbitrage. 
Rather elaborate studies, including doctoral theses, have been written that try 
to prove or disprove the theory that option trading affects stock prices. Nothing has 
been proven conclusively, and it may never be, because of the complexity of the task. 
Logic would seem to dictate that arbitrage could temporarily affect a stock's move­
ment if it has discount, in-the-money options shortly before expiration. However, one 
would have to reasonably conclude that the size of these arbitrages could almost 
never be large enough to overcome a directional trend in the underlying stock itself. 
Thus, in the absence of a definite direction in the stock, arbitrage might help to per­
petuate the inertia; but if there were truly a preponderance of investors wanting to 
buy or sell the stock, these investors would totally dominate any arbitrage that might 
be in progress. 
RISK ARBITRAGE USING OPTIONS 
Risk arbitrage is a strategy that is well described by its name. It is basically an arbi­
trage - the same or equivalent securities are bought and sold. However, there is gen­
erally risk because the arbitrage usually depends on a future event occurring in 
order for the arbitrage to be successful. One form of risk arbitrage was described 
earlier concerning the speculation on the size of a special dividend that an underly­
ing stock might pay. That arbitrage consisted of buying the stock and buying the put, 
when the put' s time value premium is less than the amount of the projected special 
dividend. The risk lies in the arbitrageur's speculation on the size of the anticipated 
special dividend. 
MERGERS 
Risk arbitrage is an age-old type of arbitrage in the stock market. Generally, it con­
cerns speculation on whether a proposed merger or acquisition will actually go 
through as proposed.