Dividend Arbitrage

This is an arbitrage strategy whereby the options trader buys both the stock and the equivalent number of put options before ex-dividend and wait to collect the dividend before exercising their put.

Example

The combined expiration payoff can be fixed under matched contract assumptions. That is not a guarantee of risk-free profit: financing, stock borrow, dividends, early assignment, execution and settlement must also be considered. American-style box spreads can be disrupted by early exercise. A price difference alone does not establish an executable arbitrage.

On ex-dividend, they collects $200 in the form of dividends and exercises their put to sell their stock for $10000, bringing in a total of $10200. Since their initial investment is only $10100, they earn $100 in zero risk profits.

Dividend Capturing using Covered Writes

Another way to collect dividends is by using covered calls. This strategy is detailed in this article.

Scope of the risk estimate

The combined expiration payoff can be fixed under matched contract assumptions. That is not a guarantee of risk-free profit: financing, stock borrow, dividends, early assignment, execution and settlement must also be considered. American-style box spreads can be disrupted by early exercise. A price difference alone does not establish an executable arbitrage.