Dividents arbitrage

Discussion in 'Strategy Development' started by StasDesy, Oct 4, 2005.

  1. StasDesy

    StasDesy

    Hi All,
    I'm curredntly looking into something that looks like a clear arbitrage.
    I bought 500 shares of FRO stock that pays 30% dividents a year. I sold 2 in money (May) calls and bought 3 out of money puts.
    May 2006 puts cost me 10% of the stock price.
    Now if the stock tanks 20% I'm protected by the sold calls and purchased puts. If it goes up I can be assigned on 2 contracts I sold and this is ok. If it falls slightly or stays the same I still get 7% quarterly divident.

    Do I miss something here ?
     
  2. MTE

    MTE

    Where did you get 30% from? The current dividend yield on FRO is 18.39%.
     
  3. StasDesy

    StasDesy

    The current rate is 12.90$ which is 29.2%
    May I ask how did you come up with18% ?
     
  4. Those calls will get excercised the day before the stock goes ex-div and you won't get the dividend. Look at it from the perspective of the guy who owns those options. He has to exercise. You are betting he is sloppy and doesn't. Might work, but it's far from a sure thing.
     
  5. MTE

    MTE

    OK, I see. The last one was $2, so based on that it's 18.39%.
     
  6. StasDesy

    StasDesy

    It is a sure that I will get the time premium for the May calls which the guy who bought it will want to exercise in December.

    And I still count on his sloppiness though :)

    The puts are totaly different don't you think ? There it is almost sure thing.

    I created the covered calls for one reason - see how often I will get assigned. I pulled the similar trick couple of times already and I'm assigned in 70% of the cases.