Option Arbitrage Screening and Dividend-Date Risk
Summary
The document describes an attempted search for option combinations whose payoff would remain profitable across possible underlying prices. The original example combines short puts and calls with long options at other strikes, and the author asks whether the apparent minimum profit holds after commissions and other risks. In an update, the author explains using a linear programming model to scan S&P 500 tickers and expirations for portfolios intended to profit whether the underlying falls to zero or rises substantially.
The update identifies an important flaw in a related synthetic-option idea: an ex-dividend date before expiration can undermine the apparent opportunity. The post does not provide a full payoff audit of the listed position or establish that the proposed portfolio is arbitrage-free. It is therefore a cautionary example about model assumptions and dividend timing, not evidence of a reliable strategy. Trading costs and the operational details of executing the component positions also matter to the claimed profit.
Key ideas
- The author used linear programming to search option combinations for profits across a range of underlying prices.
- A payoff screen can miss risks tied to dividend timing before option expiration.
- The listed portfolio's claimed minimum profit is posed as a question and is not verified in the document.
- Commissions and execution of multiple option legs can affect the apparent opportunity.
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Full text
# Risks Associated with Option Arbitrage Portfolio # Risks Associated with Option Arbitrage Portfolio If my math is correct, if I construct the following portfolio of options the worst that I can do regardless of what the underlying does is profit $1.74 (less commissions). Is this correct? Are there any risks that I'm not taking into account? How likely are those risks to occur? - SELL 2 SPY150918P00225000 FOR 17.50 (444 open) - SELL 1 SPY150918C00169000 FOR 39.44 (105 open) - SELL 1 SPY150918C00168000 FOR 40.44 (104 open) - BUY 1 SPY150918P00170000 FOR 0.05 (1500 open) - BUY 1 SPY150918P00167000 FOR 0.04 (1500 open) - BUY 1 SPY150918C00224000 FOR 0.03 (3010 open) - BUY 1 SPY150918C00226000 FOR 0.02 (1192 open) Thanks! -JWW UPDATE 2016-10-03: Originally, I was trying to find arbitrage opportunities in options with the same underlying and the same expiration using a linear programming toy I was working on at the time. It would do this: - Go through each ticker on the S&P 500 - Go through each option expiration period - Build an LP model that combines buying / selling puts / calls so that the model is profitable regardless what happens to the underlying (falls to 0, or goes to ~infinity) The model discovered a strategy that worked like this (my post on trade-king forums at the time): > First find a call and put option (sell 1, buy the other) with the same strike and expiration that if executed today would be profitable. If you're selling a put, prepare to sell 100 shares of the underlying short. When you do, your profit is locked in. Set up a trigger to sell short the stocks when the underlying falls to a certain point. It seems like this would create a synthetic call option that you get paid to get into. If you come into a situation where you buy a put and sell a call; be prepared to buy 100 shares (margin?). This would create a synthetic put. If you're lucky enough to find this situation on the same stock at the same expiration; you could do a synth-straddle. ...and why it doesn't work: > Unfortunately it looks like ex-div date nukes this concept. 96% of the stocks that show up in my screener as being profitable through this trade have an ex-div date < option expiration date. Oh well... Hope this helps someone
Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.