medium · Market Microstructure
An authorized participant (AP) observes that an S&P 500 ETF is trading at $501.00 while the net asset value (NAV) of the underlying basket is $500.00.
To profit from this 20-basis point discrepancy, what action should the AP take?
- Buy the underlying basket of stocks and create new ETF shares to sell on the exchange.
- Short the underlying basket and buy ETF shares until the prices converge.
- Place a stop-limit order on the ETF to capture the momentum of the premium.
- Redeem ETF shares for the underlying basket and sell the stocks in the open market.
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