35 lines
2.4 KiB
Plaintext
35 lines
2.4 KiB
Plaintext
Chapter 27: Arbitrage 425
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be able to use another in-the-money put. Suppose the XYZ July 80 put could be sold
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at 22. This would be the same as buying the stock at 58, because if the put were
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assigned, the arbitrageur would be forced to buy stock at 80 - the striking price - but
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his net cost would be 80 minus the 22 points he received from the sale of the put, for
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a net cost of 58. Again, the arbitrageur is able to use the sale of a deeply in-the-money
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option as a substitute for the stock trade.
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The examples above assumed that the arbitrageur sold a deeper in-the-money
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option at parity. In actual practice, if an in-the-money option is at a discount, an even
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deeper in-the-money option will generally be at a discount as well. The arbitrageur
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would normally try to sell, at parity, an option that was less deeply in-the-money than
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the one he is discounting.
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In a broader sense, this technique is applicable to any arbitrage that involves a
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stock trade as part of the arbitrage, except when the dividend in the stock itself is
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important. Thus, if the arbitrageur is having trouble buying or selling stock as part of
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his arbitrage, he can always check whether there is an in-the-money option that could
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be sold to produce a position equivalent to the stock position.
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DIVIDEND ARBITRAGE
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Dividend arbitrage is actually quite similar to the basic put arbitrage. The trader can
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lock in profits by buying both the stock and the put, then waiting to collect the divi
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dend on the underlying stock before exercising his put. In theory, on the day before
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a stock goes ex-dividend, all puts should have a time value premium at least as large
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as the dividend amount. This is true even for deeply in-the-money puts.
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Example: XYZ closes at 45 and is going to go ex-dividend by $1 tomorrow. Then a
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put with striking price of 50 should sell for at least 6 points ( the in-the-money amount
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plus the amount of the dividend), because the stock will go ex-dividend and is expect
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ed to open at 44, six points in-the-money.
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If, however, the put' s time value premium should be less than the amount of the
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dividend, the arbitrageur can take a riskless position. Suppose the XYZ July 50 put is
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selling for 5¾, with the stock at 45 and about to go ex-dividend by $1. The arbi
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trageur can take the following steps:
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1. Buy the put at 5¼.
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2. Buy the stock at 45.
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3. Hold the put and stock until the stock goes ex-dividend (1 point in this case).
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4. Exercise the put to sell the stock at 50. |