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