Question

1. Please construct an investment strategy based on the dividend inconsistency between SPX and SPY based on the following information.

2. Please estimate the cost of the strategy.

3. Please estimate the potential return of the strategy, given the dividend yield of S&P500 is 2.1%

	Date	Maturity	Strike	Call		Put
				bid	ask	bid	ask
SPY	1/7/2019	1/17/2020	350	0.2	0.24	94	97.5
SPX	1/7/2019	1/17/2020	3500	0	2.75	901.4	920.5

Answer 1

a. as per the value of premium given market is seems bearish so i am here making a strategy in case of both SPY & SPX that buy put & sell put of same strike price so it will cover unlmted profit & limted risk is also there in it.

Buy Put & sell Put of SPY

Buy Put & sell Put of SPX

a cost of strategy

incase of SPY strategy cost = premium paid in buying the Put ~ premium recieve in selling the Put

= 94 ~97.5 = 3.5

in case of SPX = 901.4~920.5 = 19.1

total strategy cost = 3.5 + 19.1 = 22.6 (profit/ in flow)

this will the maximum loss in this strategy up to net premium paid only . but profit will be unlimted.

b. dividend just decrease call premium & increse put premium if it is given in the form of cash dividend so potential return will remain same post S &P dividend.