My recent article on SunEdison (SUNE) gained a lot of attention from retail investors' community, as I can see from the page views. I have to admit that I made a mistake in calculations, and the trade is not, in fact, riskless (I submitted a correction in the comments section). Nevertheless, this finding has not made the trade irrelevant. I still consider it very attractive for bulls. Today, I want to talk about a strategy based on the principle of call-put parity. Recall that: C + PV(x) = P + S where: C = price of the European call option PV(x) = the present value of the strike price (x), discounted from the value on the expiration date at the risk-free rate P = price of the European put S = spot price, the current market value of the underlying asset Here is input data we have after the market close: (Source: TD Waterhouse) Note: we will be discussing options with $1 and $1.5 strikes. Rearranging the equation, we get: C - P = S - PV(x) Now let us work with the two strike prices we have selected. Trade #1: Options with the $1.50 strike Substituting the market inputs (last prices), we get: $0.60 - $1.14 = $1.20 - $1.50($0.54) = ($0.30)$0.54 = $0.30 As you can see, the equation is not, in fact, equal. Even we adjust the right side for the present value of the strike, this is not going to balance the equation out. This clearly means that there is an arbitrage opportunity in these securities. The right side of the equation is the synthetic long (short put, long call) and has the same profile as long stock. The right side of the equation is stock only. The left side is more expensive than the right side, even though both sides are essentially the same stock. What would you do if the same stock traded at different prices on different exchanges? You would obviously short the more expensive one and buy the cheaper one and wait until the prices converge. This situation is no different. In order to execute an arbitrage trade, you would short the synthetic long and buy the stock simultaneously. Here is how the trade looks like: (Source: author's calculations) The initial outlay is that you, as an arbitrageur, are getting into a credit position worth $1.74 per one share: buy a call ($0.60), sell a put ($1.14) and sell the stock short ($1.20). By doing so, you are locking a profit of $0.24 per share, no matter, what happens at the options' expiration: - If the company goes bankrupt, and the stock falls to zero, you: lose the premium on call ($0.60), pay out premium on the put ($1.50 per share), offset the loss with the premium on put ($1.14), and make $1.20 on the short position. The end result is a profit of $0.24; - If the stock goes up anywhere higher than $1.5 (I chose $2 or $10 per share for convenience) at expiration, your $0.24 profit is still secure: you lose $0.10 on the call @ $2 per share (make $0.50 but lose the $0.60 premium), lose $0.80 on the short (market price of $2 less the initial price of $1.20 per share), keep the put's premium of $1.14. Does not look bad to me at all! Trade #2: Options with the $1.00 strike This trade is a bit more profitable, and you will see why: (Source: author's calculations) The situation is the same - only the numbers are different: - If the company goes bankrupt, and the stock falls to zero, you: lose the premium on call ($0.70), pay out premium on the put ($1.00 per share), offset the loss with the premium on put ($0.76), and make $1.20 on the short position. The end result is a profit of $0.26; - If the stock goes up anywhere higher than $1.0 (I chose $2 or $10 per share for convenience) at expiration, your $0.26 profit is still secure: you make $0.30 on the call @ $2 per share (make $1.00 but lose the $0.70 premium), lose $0.80 on the short (market price of $2 less the initial price of $1.20 per share), keep the put's premium of $0.76. The one thing I would suggest is that you go into this trade with at least 5 options contracts for each leg (or 500 shares) because, otherwise, broker commissions will eat the entire profit of this arbitrage trade. In fact, this trade is going to cost me around $30, so I am not going into it without making at least a $100 profit. I am comfortable with going into this trade with 1000 shares and 10 option contracts on each leg. Keep in mind that my calculations have excluded any interest a broker may charge on the short position.