From the May 01, 2011 issue of Futures Magazine • Subscribe!

Dividend options and futures

Between puts and calls

Assume a stock trades at S = $40, the difference P – C of a put to a call option with the same maturity and strike price is $3. Let the present value of the strike price be $41. Put-call parity would imply a present value for the dividend of:

PV(dividends) = P – C + S – PV(strike) = $3 + $40 – 41$ = $2

If an investor expects the company to pay $3 — in present value terms — instead of the $2 implied, he should borrow money, invest it in the stock and create a short synthetic futures by selling a call and buying a put on the underlying.

By owning the stock, the investor would profit from the higher dividend payment while being hedged by the options.

Marco Erling works as portfolio manager and quantitative analyst for structured products with HSBC Global Asset Management. He studied mathematics at the University of Dortmund in Germany and graduated with an MBA from ESADE Business School in Barcelona. He is a CFA Charterholder and a Certified FRM holder. E-mail him at

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