When Dividend Arbitrage Opportunity occurs?
The Dividend Arbitrage opportunity will occur when dividends is more than the extrinsic value of the put options to be bought and commissions. You can also grab arbitrage opportunity before the ex-dividend date, because both the stock price and its put option calls are peaking in price. After the ex-dividend rate, the stock will decline by a specific amount at a specified date, with lower call options and higher put options. The decline in the stock will offset any gains from the dividend.
Consider the following prices and dividend:
1. Stock Price: $30
2. Dividend: $1
2. Strike Price: $32
3. Put Contract Price: $2.25
4. Dividend Expiry Date: 7 days
Intrinsic Value= Strike Price – Stock Price= $2
Extrinsic Value= Option Premium – Intrinsic Value= $.25
Now, Dividend > (Extrinsic Value of Put Options + Commissions) and thus arbitrage opportunity.