Yet one more play on this is to buy 10 deep ITM SPY calls (Dec 60s) and buy the SPX Dec 1900 put to form a "gut." Just thinking out loud. AZD
Do your homework and report back--look at how much a Dec '07 ITM call cost both for SPX and SPY a few years back and see what it's worth today. I mean, there's a simple way to answer to your question definitively. You could also compare OEX and XEO options to see if the difference between American and European options tells the story.
Yahoo Finance for January 22, 2004 has the SPX at 1143.94 and the SPY at 114.80 with an adjusted close of 109.29. I don't have immediate access to options data of that same time period. AZD
After looking at these strategies more closely (namely the put spread), they all provide at least 4 to 5% return with the opportunity for much more. I think you guys give up too easily. AZD
Then go for it! We've already told you why theres a price discrepancy. Dec '07 XEO 740 put: 60.40/62.70 Dec '07 OEX 740 put: 75.30/77.30 This is not $15 of free money. OEX right now is at 663.83. Note the XEO options are pricing the index at 680 to 678. Something to think about--if your short SPY puts get exercised, will you hold the stock until your long SPX puts expire? Have you accounted for tying up $16,000 per contract (if you sold the 160Puts) for nearly 3 years? That alone will account for nearly $3,000 in that period.
I think I have accounted for everything. Unless there is a large divergence between SPY and SPX prices, there are opportunities. Not $15 of free money as there is more risk the closer to the money you go. Here is something that possibly you are not considering. It may be possible to negotiate with your broker so that your SPY puts would not be considered naked due to the close correlation between the SPY and the SPX. In this case, you get a "free position" with interest on the proceeds. What am I missing? AZD
OEX and XEO are both settled on the S & P 100, right? One is American style and the other is European style. Where would one go wrong using the example (740 puts) that you posted? AZD
Think about this from the other side of your transaction. Lets use your values for SPY: Sell 10 SPY (142.28) Dec 09 190 puts at 47.80 So, you're the guy who bought these SPY puts for essentially $.08. The next dividend coming up for SPY is in March and will likely be about $.55. After the dividend, SPY immediately drops $.55. So, you hold the stock through div-ex, pocket the $.55 dividend and exercise your puts. You will have made $.55 - $.08 (x100x10) The guy who sold the option now owns a stock that's worth $.55 less than it was a day ago. He can sell another 190 put and sell the stock, but he will have lost the bid/ask on the option and .55 on the stock. Wash, rinse, repeat for the next 3 years. It is possible for you to make more than the risk free rate on your short puts if the buyer of your puts isn't optimally exercising. There are dozens of academic papers on this. I hope that helps a little. Just look at the transaction from the other side to see what will happen. The OEX case is dramatically more complicated. OEX options are pricing a synthetic future against the OEX cash price.