What is a dividend arbitration?

Dividend arbitration is a low -aid method of trading with shares that includes the purchase of put or seller, the possibility of specific shares, as well as the underlying stock, provided that the shares are promised by dividend. When the date due to the dividend arrives, the trader then applies his option and selects the price of the option. The trader also collects dividend on stocks that, when adding to the money obtained on the option, should outweigh the price of initial transactions. Having shares and an option in Tandem distracts the risk that shares volatility will cause damage to the merchant. When the company announces a dividend, it announces a record date, which means the last possible time for the investor to be in the company's books to qualify for dividend. The exchange, which processes shares, then sets the date of the ex-present, after which anyone buys shares, will not be entitled to The Dividend. Investors can use this data and dividends information to practice dividend arbitration.

For example, the company for storage and announces the upcoming dividend to investors with $ 1 in USD (USD) per share. At the time it is announced, shares and sell for $ 25 per share. The trader buys 100 shares of shares for $ 2,500. To perform dividend arbitration, they must then purchase the equivalent value of the shares in return to balance the transaction.

In this example, the investor is now buying a $ 5.50 storage contract for paying $ 550 in the process for $ 30. When the shares go ex -dend, the investor collects a dividend amount of $ 100, then do the PUT option and get a total of $ 3,000 from the sale of shares. This amount, added to the dividend collected, gives an investor $ 3,100, which prevails over the original payment of $ 3,050 for buying shares and options. Using dividend arbitration, the investor received $ 50 for a small risk.

by playing shares from both sides is the investor protected from unexpected movement up or down to stock inthe time between two sets of transactions. Using the above example, there is a possibility that the stock price and could fire on dividend reports. Although it would reduce the value of the investor's possibility, it would be covered by the purchase of shares.