39 lines
3.1 KiB
Plaintext
39 lines
3.1 KiB
Plaintext
Chapter 27: Arbitrage 427
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generally declared a special dividend in the fourth quarter of each year, but that its
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normal quarterly rate is $1.00 per share. Suppose the special dividend in the fourth
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quarter has ranged from an extra $1.00 to $3.00 over the past five years. If the arbi
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trageur were willing to speculate on the size of the upcoming dividend, he might be
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able to make a nice profit. Even if he overestimates the size of the special dividend,
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he has a limited loss. Suppose XYZ is trading at 55 about two weeks before the com
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pany is going to announce the dividend for the fourth quarter. There is no guarantee
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that there will, in fact, be a special dividend, but assume that XYZ is having a rela
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tively good year profitwise, and that some special dividend seems forthcoming.
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Furthermore, suppose the January 60 put is trading at 7½. This put has 2½ points of
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time value premium. If the arbitrageur buys XYZ at 55 and also buys the January 60
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put at 7½, he is setting up a risk arbitrage. He will profit regardless of how far the
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stock falls or how much time value premium the put loses, if the special dividend is
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larger than $1.50. A special dividend of $1.50 plus the regular dividend of $1.00
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would add up to $2.50, or 2½ points, thus covering his risk in the position. Note that
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$1.50 is in the low end of the $1.00 to $3.00 recent historical range for the special
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dividends, so the arbitrageur might be tempted to speculate a little by establishing
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this dividend risk arbitrage. Even if the company unexpectedly decided to declare no
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special dividend at all, it would most likely still pay out the $1.00 regular dividend.
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Thus, the most that the arbitrageur would lose would be 1 ½ points (his 2½-point ini
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tial time value premium cost, less the 1-point dividend). In actual practice, the stock
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would probably not change in price by a great deal over the next two weeks (it is a
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high-yield stock), and therefore the January 60 put would probably have some time
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value premium left in it after the stock goes ex-dividend. Thus, the practical risk is
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even less than 1 ½ points.
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While these types of dividend risk arbitrage are not frequently available, the
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arbitrageur who is willing to do some homework and also take some risk may find that
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he is able to put on a position with a small risk and a profitability quite a bit larger
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than the normal discount dividend arbitrage.
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There is really not a direct form of dividend arbitrage involving call options. If
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a relatively high-yield stock is about to go ex-dividend, holders of the calls will
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attempt to sell. They do so because the stock will drop in price, thereby generally
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forcing the call to drop in price as well, because of the dividend. However, the hold
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er of a call does not receive cash dividends and therefore is not willing to hold the
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call if the stock is going to drop by a relatively large amount (perhaps ¾ point or
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more). The effect of these call holders attempting to sell their calls may often pro
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duce a discount option, and therefore a basic call arbitrage may be possible. The arbi
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trageur should be careful, however, if he is attempting to arbitrage a stock that is |