When used on a security with low volatility (causing lower options premiums) and a high dividend, dividend arbitrage can create profits while assuming very low to no risk. An important principle in options pricing is called a put-call parity. Aebitrage says that the value of a call option, at one strike price, implies a certain fair value for the corresponding put, and vice versa. The argument, for this pricing relationship, relies on the arbitrage opportunity that results o;tion there is divergence between dovidend value of calls and puts with the same strike price and expiration date.
Arbitrageurs would step in to make profitable, risk-free trades until the departure arhitrage put-call parity is eliminated. Knowing how these trades work can give you a better feel for how put options, call options and the underlying stocks are all interrelated. Similar to Hull (2003), this paper relaxes the non-dividend-paying assumption.
The underlying security price in the original European-style put-call parity relation is adjusted downwards by the present value of expected dividends before the option expires. The divisend bound of the American-style put-call parity relation is adjusted upwards by the amount of the present value of expected dividends.
The results provide theoretical boundaries of options prices and expand application of put-call parity relations to all options on currencies and dividend-paying stocks and stock put option dividend arbitrage financial, both European-style and American-style. The option put-call parity condition quantifies the relations among the price of a call option, the price of an otherwise.