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Not Quite Dividend Arbitrage But Still The Same Gain On $AAPL

As of Thursday 11/6 11:30AM PT, I have the following quote on AAPL and options that I'm interested in:

AAPL $108.44 (-0.42)

AAPL 11/7 108.00 Put $0.3/$0.31

AAPL 11/14 108.00 Put $0.96/$0.98

AAPL 11/14 106.00 Put $0.39/$0.40

AAPL 11/14 108.00 Call $1.4/$1.42

Now, before I present my trading strategy, here's a quick primer on dividend arbitrage: It's a trade where you own the stock that is about to go ex-dividend plus you own a deep ITM put option, at a price that will allow you to sell your stock for a net gain equal to the dividend that you collect. So in essence, you pocket the dividend without taking any risk while your buy/sell trade is at break-even.

In reality, option prices already price in the expected dividend, so this riskless trade does not exist (especially on a heavily traded stock such as AAPL). So, here's is the "next best thing" that I'm proposing.

Trade #1: sell 11/7/2014 Apple $108 put options at $0.31. Here, the risk is that Apple fall below $108 and you rack up substantial loss in exchange for only $0.31.

Trade #2: create a 'hedging' debit-spread using 11/14/2014 Apple $106 & $108 put (0.97-0.4=$0.57). Here, the risk is $0.57 if Apple stays above $108 by next week, but you gain up to $2 if it goes below $108.

Notice that trade #2 becomes a hedge for trade #1 should Apple dip below $108 on 11/7. (almost like a protected put at $108 but only protects you down to $106). However, this becomes a losing trade if Apple stays above $108 because on Monday I'll have paid for $0.57-.31=$0.26 in put spread that I don't want. I can mitigate this risk by closing out the spread, hopefully at 0.26 to break even.

Trade #3: On Monday, sell to open 11/14/2014 108 Call at market price. Notice that #3 creates a covered call with the Apple stock that was just put to you on Friday when your 11/7/2014 108 Put goes in-the-money. The market price you get will be at least $0.47 less than the $1.41 quote, but assuming the stock didn't move wildly, we should expect at least $0.57 to $0.95. (more if Apple moves up on Monday morning). Let's just assume we got in at $.75

So, here's a tally of what will happen on Monday 11/10/2014:

We collected $0.31 from the sale of the 11/7/2014 108 put.

Stock went down below $108 so this put forces us to buy 100 shares of Apple at 108.

We already paid $0.57 for the 11/14/2014 116/118 put spread.

We will collect $0.75 (see assumption above) from the sale of 11/14/14 118 put on Monday.

On Friday 11/14/2014, here's the profit/loss:

1) if it closes at 106, then the cost 108-0.31+0.57-0.75=107.51

but the profit is 106-107.51+2, or a gain of $0.49

2) if it closes at 107, then profit is 107-107.51+1, or a gain of also $0.49.

3) if it closes at 108, then profit is 108-107.51, or a gain of $0.49.

4) if it closes at anything above 108, then profit is still 107.51-108 because the put spread is now worthless but the covered call forces you to sell at 108.

5) if it closes at anything below 106, however, this is where the risk will add up. Let's say it closes at 105, then the loss now becomes: 105-107.51+2= -0.51. Likewise, at 104, it is -1.51 and so on.

Considering the commission cost, bid/ask spreads on the trades and the price movement between Friday and Monday, this type of trades cannot be done on a small account (I'm thinking an account with $110k is the minimum for a lot of 10 contracts per trade)

The rate of return for this "low risk" trade is 0.49/110=0.004454, or 23% on annualized basis since we are looking at one week time frame. And assuming you are "put" the stock at $108 over the weekend, you'll get the dividend which is ex-dividend on Monday.

Note: selling cash-secured (naked) put (as in trade 1), debit bearish spread (as in trade 2), and covered call (as in trade 3) requires the appropriate options level and cash.

Disclosure: The author is long AAPL.

Additional disclosure: currently have long AAPL calls