capturing a stock’s dividend payout with the use of stock futures and options(a trading strategy)

OVER the past couple of quarters, many traders have been deprived of a regular avenue of making money. With the slowing economy forcing companies to tighten their purse strings, the number of dividend announcements has declined sharply. This, in turn, has denied traders an opportunity to engage in dividend arbitrage, a trading strategy that attempts to capture a stock’s dividend payout with the use of stock futures and options. 
    “With the quantum of dividends dropping and spreads narrowing, there are very little opportunities in dividend arbitrage of late,” said Dharam Chand Sethia of Kolkata-based Kredent Brokerage. During the bull run, when companies doled out liberal dividend every quarter, traders profited immensely from this near-risk-free arbitrage, especially in cases of higher payouts. 
    In this trading strategy, traders buy shares that announce dividends prior to the ex-dividend date — the day before which the shares need to be bought to get the dividend. They also buy an equivalent amount of the underlying’s put options as the stock declines by the dividend amount when it goes ex-dividend. So, traders benefit from the downside in the stock through their positions in put options. Another section of traders uses the more complex put-call parity, which defines the relationship between the price of a call option and a put option with identical strike prices 
    and expiries. The theory is that dividends boost the value of puts and decrease the value of calls. Once a dividend is announced, the value of puts usually rises while that of the call decreases by a similar amount. So, in the event of divergence in the value of put and call, arbitrageurs come into the picture to get rid of the deviance from put-call parity. The higher costs involved due to dwindling volumes in stock futures and options are also deterring traders from venturing into such strategies.