Rare arbitrage profit from call vs put prices: explain why not being taken?

Discussion in 'Options' started by Option Trader, Feb 8, 2010.

  1. In the event that the premium on the put price is greater than the premium on the call price (assuming same strike price and same expiration month), it presents a rare opportunity, i.e. instead of buying the stock, you can buy the calls and sell the puts (then you have the same potential of upside and same exposure to the downside)...

    ...and if you want, you can also short the stock giving you a "reversal" or a reverse conversion, which, at least in theory, presents an arbitrage profit.

    It would seem this opportunity should be taken quickly by the institutional traders and not be available for long, however, anyone who has the tools to right now scan the market, will see there is currently a stock which offers this arbitrage profit, for at least a week now, and it's NOT being taken by the institutional traders.

    Does anyone have a good explanation WHY NOT?
     
  2. rosy2

    rosy2

    are you assuming whenever there's skew there's an arbitrage?

    anyway, what you think you see is likely not there. put-call parity cancels this out
     
  3. If a sent you a PM and gave you the stock, you would take the opportunity yourself with your eyes closed?
     
  4. dcvtss

    dcvtss

    Is it a hard to borrow? A lot of times these opportunities exist only if you can locate the shares...
     
  5. Yes, it's hard to borrow.
     
  6. MTE

    MTE

    Well, here's your answer. There is no arb or rather there is a mispricing precisely because the stock is hard to borrow.
     
  7. dont

    dont

    Dividends
     
  8. I have my doubts about what you're saying, as it's hard-to-borrow with Penson, but not by IB, and I'm quite sure not htd for institutional traders. Also there is Locate Stock and other such services. Maybe you say because it's not available in big supply?
     
  9. Not correct, because here you hold the calls yourself. And if you ask about shorting the stock for arbitrage purposes, so it's anyway far from being a dividend paying stock.
     
  10. A pending dividend, regular or special, would drive the cost of the puts up relative to the calls. A high indicative borrow rate would drive the price of the calls up. In either case, put call parity holds. It just appears distorted.

    The other thing to check out is that you're looking at a standard option contract (100 shares). Options adjusted due to special dividends and corporate actions may have different delivery terms and what you think is a distortion really isn't.

    If it looks too good to be true, it almost always is. There are no free lunches except on the bread line :)
     
    #10     Feb 8, 2010