Dividend Arbitrage

[maninjapan]

guys, was just reading through this strategy and wanted to know what the catch is (And there has to be one.....)

XYZ stock is trading at $90 and is paying $2 in dividend tomorrow. A put with a striking price of $100 is selling for $11. The options trader can enter a riskless dividend arbitrage by purchasing both the stock for $9000 and the put for $1100 for a total of $10100.

On ex-dividend, he collects $200 in the form of dividends and exercises his put to sell his stock for $10000, bringing in a total of $10200. Since his initial investment is only $10100, he earns $100 in zero risk profits.

 

[xflat2186]

The only problem is the amount of the dividend is priced into the put since the whole world knows is there. You wont be able to buy the put and the stock at the prices you posted. IF you could the whole world would do it.

 

[spindr0]

Free money?

There are no free lunches

If it sounds too good to be true, it is

If your calculator gives you an answer like that, throw away the user


In your example, the dividend will be priced into the put and it will trade for $12 before the ex-div.

 

[maninjapan]

yep, thanks guys. Figured thats what it would be.

Are there any practical strategies in regards to Dividend arbitrage?

 

[xflat2186]

Not really. There are a number of threads on this topic if you use the search feature.

 

[KINGOFSHORTS]

Quote from xflat2186:

The only problem is the amount of the dividend is priced into the put since the whole world knows is there. You wont be able to buy the put and the stock at the prices you posted. IF you could the whole world would do it.

hehe, its amazing how many folks do not seem to realize the put has the dividend included in the premium or the calls have the dividends priced out of the premium. All they need to do is a little bit of math.

 

[spindr0]

Quote from KINGOFSHORTS:

hehe, its amazing how many folks do not seem to realize the put has the dividend included in the premium or the calls have the dividends priced out of the premium. All they need to do is a little bit of math.

That's an absolutely SHOCKING revelation! Next thing ya know, they be saying that Pin Risk is a lock!

 

[dagnyt]

Quote from maninjapan:

yep, thanks guys. Figured thats what it would be.

Are there any practical strategies in regards to Dividend arbitrage?

Arbitrage is for the big players. They trade in huge size and are willing to take very small profits per 100 shares.

Your commissions are far too high to participate in that arbitrage.

Leave this game to the professionals.

Mark

 

[maninjapan]

thanks guys for the replies. Kinda figured that was the case. Just that Id seen a number of articles on it and wanted to to double check.

 

[Alphaman84]

Quote from maninjapan:

yep, thanks guys. Figured thats what it would be.

Are there any practical strategies in regards to Dividend arbitrage?

You can pay for the put by selling a call. I have found it easier to just sell a deep ITM call instead, as long as it has some time value. Dividend arbitrage is possible, but very time consuming and the profits arn't really that large after comissions, spreads etc.

If someone knows of a good screener for finding dividend arbitrage opportunities, I would be happy to hear about it.