424 Part IV: Additional Considerations 
The stock transaction is a 12-point profit, since the stock was bought at 58 and is sold 
at 70 via the put exercise. The cost of the put - 11 ¾ points - is lost, but the arbi­
trageur still makes ¼-point profit. Again, this profit is equal to the arrwunt of the dis­
count in the option when the position was established. Generally, the arbitrageur 
would exercise his put option immediately, because he would not want to tie up his 
capital to carry the long stock. An exception to this would be if the stock were about 
to go ex-dividend. Dividend arbitrage is discussed in the next section. 
The basic call and put arbitrages may exist at any time, although they will be 
more frequent when there is an abundance of deeply in-the-money options or when 
there is a very short time remaining until expiration. After market rallies, the call 
arbitrage may be easier to establish; after market declines, the put arbitrage will be 
easier to find. As an expiration date draws near, an option that is even slightly in-the­
money on the last day or two of trading could be a candidate for discount arbitrage. 
The reason that this is true is that public buying interest in the option will normally 
wane. The only public buyers would be those who are short and want to cover. Many 
covered writers will elect to let the stock be called away, so that will reduce even fur­
ther the buying potential of the public. This leaves it to the arbitrageurs to supply the 
buying interest. 
The arbitrageur obviously wants to establish these positions in as large a size as 
possible, since there is no risk in the position if it is established at a discount. Usually, 
there will be a larger market for the stock than there will be for the options, so the 
arbitrageur spends more of his time on the option position. However, there may be 
occasions when the option markets are larger than the corresponding stock quotes. 
When this happens, the arbitrageur has an alternative available to him: He might sell 
an in-the-money option at parity rather than take a stock position. 
Example: XYZ is at 58 and the XYZ July 50 call is at 7¾. These are the same figures 
as in the previous example. Furthermore, suppose that the trader is able to buy more 
options at 7¾ than he is able to sell stock at 58. If there were another in-the-money 
call that could be sold at parity, it could be used in place of the stock sale. For exam­
ple, if the XYZ July 40 call could be sold at 18 (parity), the arbitrage could still be 
established. Ifhe is assigned on the July 40 that he is short, he will then be short stock 
at a net price of 58 - the striking price of 40, plus the 18 points that were brought in 
from the sale of the July 40 call. Thus, the sale of the in-the-money call at parity is 
equivalent to shorting the stock for the arbitrage purpose. 
In a similar manner, an in-the-money put can be used in the basic put arbitrage. 
Example: With XYZ at 58 and the July 70 put at 11¾, the arbitrage could be estab­
lished. However, if the trader is having trouble buying enough stock at 58, he might