DF just declared a 15$ special divy payable in early Apr. What's to stop me from buying a bunch of stock right now and buying ITM APR 50 puts for 2.85?
This is free money and the market never seems to offer free money. What am I missing here?
Question for the Board
Started by
Cirrus
, Mar 02 2007 10:26 AM
6 replies to this topic
#2
Cirrus
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Posted 02 March 2007 - 10:40 AM
The DF Apr 50 puts are selling for 3.5 while the stock trades at 46.75 right now. That means I could by the stock and the puts for a net cost of 50.25 per paired share. I would then collect the 15$ special divy in early Apr and then exercise my puts afterwards and get out of the stock for $50. I would get a free 14.75.
What am I missing besides the risk the divy is cancelled? I am completely hedged with the stock and put so there's no risk besides the .25 premium. What's up here?
#3
A-ha
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Posted 02 March 2007 - 10:46 AM
opps nevermind, i checked the numbers they dont support my theory
Edited by xD&Cox, 02 March 2007 - 10:49 AM.
#4
Cirrus
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Posted 02 March 2007 - 10:49 AM
xD,
I don't mind criticism.
However, I'm buying in the money puts paired with a long stock position. I can exercise the puts whenever. No matter where the stock trades I can exercise my puts at 50. This means that before expiry the most I can lose is my premium of .25 to .5. However, in between the expiry the company is giving a gigantic, whopping $15 dividend. I could collect the money and then get out of the stock guaranteed for 50 the way I see it.
#5
LeroyB3
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Posted 02 March 2007 - 10:52 AM
Cirrus,
I believe the strike price will be adjusted...so, I don't believe you have found free money.
Best,
LB
#6
A-ha
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Posted 02 March 2007 - 10:54 AM
Yes, I just checked the numbers, they don't support what I said. It seems like a free money, so weird.
However that never happens in the market, so I would be doing some research on it.
#7
Cirrus
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Posted 02 March 2007 - 11:32 AM
Cirrus,
I believe the strike price will be adjusted...so, I don't believe you have found free money.
Best,
LB
Leroy,
That's the answer I was looking for. I think you may be right. There's no way the street leaves the money on the table that easily and in that quantity. I trade options sometimes using a few basic strategies but I don't know all the nooks and crannies--especially in relation to dividends.
