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I was looking at dividend arbitrage

It seems all I need to do is find stocks with a nice dividend(e.g KO). Then find an in the money put where the time premium is less than the dividend to be paid. So this needs to be a put with few days to expiry. Also time premium will be low in low volatile stocks and dividends will be usually high in low volatile stocks.

Then collect the dividend, and exercise the put. Profit is the dividend- the time premium on the put.

Sounds pretty risk free to me. Obviously, there is a catch, what is it?

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Real world example.

AGNC = 21.79 time of post. Upcoming .22 cents ex-div Mar 27th

Weekly options Mar 27th - $22 strike put has a bid ask spread of .22 / .53.

If you can get that put for less than .21 after trade fee's, you'll have yourself a .22 cent arbitrage.

Anything more than .21 per contract eats into your arbitrage. At .30 cents you'll only see .13 cent arbitrage. But still have tax liability on .22 cents. (maybe .05 cents tax due to REIT non-exempt dividend rates) So that .13 gain is down to a .08 cents after taxes.

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  • Thanks. The beauty is that this involves a long put,so it can be done in a tax sheltered account, hence taxes are no problem – Victor123 Mar 23 '15 at 1:14
  • Can I ask you why you chose this particular company as an example out of the whole universe of stocks with outrageous dividend yields...nasdaq.com/dividend-stocks/?page=2 – Victor123 Mar 23 '15 at 1:18
  • Probably because I don't trade the other stocks on your list. AGNC used to be very good for purchasing after the ex-div and selling into the run up before the next ex-div. Swing trading $2.00 was better than getting a $1.40 back in the day. – Knuckle-Dragger Mar 23 '15 at 1:45
  • Ok, but $2 is still better than $1.40, even today, but a dividend of $1.40 is more predictable than a price increase of $2. Just saying. – Victor123 Mar 23 '15 at 17:04
  • We had a saying back then. Buy At Twenty Eight, Sell At Thirty. Google "AGNC BATESAT", it was pretty popular on the AGNC yahoo forums. – Knuckle-Dragger Mar 23 '15 at 21:46
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with the semi-strong form of the Efficient Market Hypothesis expected dividends are priced into the options and security already. If you are able to locate such an arbitrage opportunity then you should take it, but I suspect it will be more more difficult than you think.

Remember that many dividends require you to have been a shareholder by a certain date prior to the dividend occurring.

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While theoretically it works it's not a realistic trade because of market efficiency. It's realistic for brokers to advertise trades like this so they can earn more customers and commission. These sorts of trades will be priced in to highly liquid big ticket names like KO and the vast majority of the market. The possibility exists with small names with less liquidity, less trading volume; however, the very execution of this trade will alter the behavior of impending traders thus minimizing any potential profits.

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