China Media Express (CCME) is a Chinese media company that is the subject of a lively debate over whether it is a scam or not. Many believe that because of it’s high margins, high level of revenue and income growth, and low level of investments, that it is a scam. Others point out that because it is audited by Deloitte and has been recommended by reputable organizations such as Forbes that CCME is legitimate. I would prefer to do more due diligence before picking a side but the confusion has caused an options mispricing.
Finance theory tells us that arbitrage should drive the price of two equivalent payout streams to have the same price. Put Call parity means that buying call options and investing the strike price of those options at the risk free rate should equate to the cost of buying common shares of the underlying and buying the puts. Both would have a guaranteed minimum payout with the upside potential should the shares rise.
C + present value of the strike price = P + price of common stock.
We can move this equation around to isolate what each individual component should trade for.
C = P + price of common stock – PV of the strike price.
For CCME this equation does not hold. Since there is such pessimism around the stock, it is impossible to find shares to short. Thus the arbitrage cannot hold and the prices are allowed to fluctuate away from this equilibrium. But if one wanted to go long the stock, then this mispricing could allow them to do that for a 15% discount to the current share price. CCME is currently trading around $17.50. You could buy September calls with a strike of $17 for $3.90 while selling the September $17 puts for $6.10 and pocket the $2.20 premium.
This could give you long exposure to CCME for the effective cost of $14.80 which is a substantial discount to the current price. So if you look into CCME and decide to go long, look into the options market for a much cheaper way to make the investment. If you already own shares of CCME consider selling them and doing the above trade. You will still have the same long exposure but will have pocketed the premium. And if you can find shares to short, you can lock in a completely risk free profit.