Hello all. There is a great arbitrage oppoprtunity between
Citigroup Seriers AA Preferred Securities (symbol c prm in
interactive brokers) and Citigroup common stock.
Citigroup recently announced the details of the premium to
market on form 8-K: Holders of Citigroup Series AA
Preferred will be able to exchange their preferred shares for
approximately 7.307 shares of Citigroup common stock.
Some simple math shows that if you multiply the current price of
citi stock (2.64 by 7.31 then you should have a preferred share
price of $19.24. But the preferred shares are trading for
15.25. Therefore, you can lock in approximately $4
in arbitrage profit by longing 1 Series AA Preferred and
shorting 7.307 shares of Citigroup common stock. You will have to
execute this trade through a broker that allows shorting on stocks
that trade below $5. Also there is a risk of having you short
shares recalled so PLEASE make sure you understand the BUY IN
risk.
A way around the buy-in risk is to synthetically create a
short using options. This is more expensive and would eat
into the arb profits but it still offers a real edge of between 10
and 15% depending on your execution price. (to do a synthetic
short you need to sell the June $5 calls and buy the June $5
puts. So to give a practical example, if you
wanted to short 10,000 shares, you would buy 100 puts and sell
100 calls ... and then go long 1370 preferred (1370 =
10000/7.31)
Best of luck to all and have a great weekend.
Newsletter
Subscribe to our email list for regular free market updates
as well as a chance to get coupons!
great arb opportunity
Posted by cmaslin on 20th of Mar 2009 at 12:00 pm
Hello all. There is a great arbitrage oppoprtunity between Citigroup Seriers AA Preferred Securities (symbol c prm in interactive brokers) and Citigroup common stock.
Citigroup recently announced the details of the premium to market on form 8-K: Holders of Citigroup Series AA Preferred will be able to exchange their preferred shares for approximately 7.307 shares of Citigroup common stock.
Some simple math shows that if you multiply the current price of citi stock (2.64 by 7.31 then you should have a preferred share price of $19.24. But the preferred shares are trading for 15.25. Therefore, you can lock in approximately $4 in arbitrage profit by longing 1 Series AA Preferred and shorting 7.307 shares of Citigroup common stock. You will have to execute this trade through a broker that allows shorting on stocks that trade below $5. Also there is a risk of having you short shares recalled so PLEASE make sure you understand the BUY IN risk.
A way around the buy-in risk is to synthetically create a short using options. This is more expensive and would eat into the arb profits but it still offers a real edge of between 10 and 15% depending on your execution price. (to do a synthetic short you need to sell the June $5 calls and buy the June $5 puts. So to give a practical example, if you wanted to short 10,000 shares, you would buy 100 puts and sell 100 calls ... and then go long 1370 preferred (1370 = 10000/7.31)
Best of luck to all and have a great weekend.