Dividend Arbitrage


DEFINITION of 'Dividend Arbitrage'

An options trading strategy that involves purchasing put options and an equivalent amount of underlying stock before the ex-dividend date and then exercising the put after collecting the dividend. When used on a security with low volatility (causing lower options premiums) and a high dividend, dividend arbitrage can create profits while assuming very low to no risk.

BREAKING DOWN 'Dividend Arbitrage'

For example, suppose that stock XXX is trading at $50 and is paying a $2 dividend in one week's time. A put option with expiry three weeks from now and a strike price of $60 is selling for $11. A trader wishing to structure a dividend arbitrage can purchase one contract for $1,100 and 100 shares for $5,000, for a total cost of $6,100. In one week's time, the trader will collect the $200 in dividends and the put option to sell the stock for $6,000. The total earned from the dividend and stock sale is $6,200, for a profit of $100.

  1. Dividend

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  2. Gross Dividends

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  3. Put Option

    An option contract giving the owner the right, but not the obligation, ...
  4. Cum Dividend

    When a buyer of a security is entitled to receive a dividend ...
  5. Arbitrage

    The simultaneous purchase and sale of an asset in order to profit ...
  6. Ex-Dividend

    A classification of trading shares when a declared dividend belongs ...
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