Frontline Ltd. (NYSE: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