Dividend Arbitrage Definition

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Definition Of Dividend Arbitrage:

An options trading strategy that involves purchasing put options and an equivalentamount 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 whileassuming very low to no risk.For example, suppose thatstock XXX is trading at $50 and is paying a $2 dividend in one week's time. A put option with expirythree weeks from now and a strike price of $60 is selling for $11. A trader wishing to structure a dividend arbitrage can purchaseone contract for $1,100 and 100 shares for $5,000, for a total cost of$6,100. In one week's time, the trader willcollect 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, fora profit of $100.

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