Last month, we saw the standard put-call ratio experience some very herky-jerky movements on its chart. As we pointed out at the time, those distortions were due to heavy dividend arbitrage in Altria (MO), JP Morgan (JPM), and AT&T (T). Since dividend arbitrage has become much more prevalent in recent quarters, we feel it’s time to examine this issue to see if there is something that needs to be done to “cleanse” the data of this extraneous, but extremely heavy, call option volume.
Question: You have repeatedly mentioned dividend arbitrage. Could you briefly tell me what it is? – J.Z., 1/17/2004
Answer: Dividend arbitrage has been around since listed call options first traded. It has become quite popular lately, though, as heavy call volume is noticeable in nearly every stock with decent open interest in its options that is paying a quarterly dividend of 20 cents or more.
