Frontline Ltd. Arbitrage Opportunity

Frontline Ltd. (FRO) recently announced an extraordinary dividend of $1.75 to current shareholders. The ex-dividend date is October 10, 2007. Currently, the market does not seem to be adequately pricing the at-the-money options due for expiration this month. At the time of this writing, Frontline Ltd. is trading between $49.50 to $50.00. Puts with a strike price of $50 are selling for close to $4, while the $50 strike calls are selling for less than 50 cents.

Here's your arbitrage play. Short Frontline Ltd. at the current price. You'll have to pony up the $1.75 dividend. You can write the October 50 put and collect close to $4.00 in premium and then you can buy upside protection for your short with a $50 call for less than 50 cents. This should net you at least a risk-free dollar.

Disclosure: Author has a short position in FRO

Comments

[dj:]

Can you walk through the math and the potential cash flows based on a move up and a move down.

2007 Oct 10 06:27 AM

[catspaw:]

ur math is challenged. 4 put cr. less .5 call dt. short at 49.5 less 1.75 x and 1.5 reg div is a loser.

2007 Oct 10 09:47 AM

[author:]

my apologies. catspaw is correct. my model was missing the ordinary dividend. quite the screw-up.

2007 Oct 10 12:01 PM

[Eggman1:]

I am mostly an options seller and usually naked calls for the bearish ideas and naked puts for my favorites to own if necessary.
Wish I had loaded on the Fro ideas. I saw same thing in June when divi was paid. I sold naked 50 calls on Monday for .35 then closed that today for .05. Then sold naked Oct. 40 puts for .20 today. No brainer. You gotta love plays like that! Eggman1

2007 Oct 10 10:03 PM

[Eggman1:]

When divi's are paid like Fro just did, does the options strike prices get adjusted to reflect the divi paid? Eggman1

2007 Oct 10 10:06 PM

[User 113289:]

did u factor in the regular dvd of 1.50?

2007 Oct 12 07:24 PM

[mmarrin:]

Owned FRO since Mar/06 @34$/as a Canadian i love the yield -I have traked all the special Div =at this rate the Div will be EQUAL to my purchase price in =6-7 years making my cost ZERO//nvr seen the likes of it B4>>Now i get why the RICHEST man in Norway ownes this as his PIGGYBANK(like all the $$ that came as special div when FRO sold it's 15% stake in Oslo x-change--who knew//waiting 4ever for it to break 40 again--4 a first I am prepared to UN-diversify INSTEAD>> hold FRO as my only stock play//i get 14%+yield [not incl spec pays] which is every year 2/they have now partnered with NAT-[great] and my invest choices are much simplier AND I CAN BUY PUTS FOR INSURANCE fromm time to time to assure a calm
Ocean ride //pun intended

2008 Mar 24 02:29 PM