MGM Mirage's

(MGG)

new all-cash offer of $71 per share for

Mandalay Bay

(MBG)

will apparently be accepted by both boards. But it still faces some regulatory hurdles because the combined entities would control over 50% of the rooms in Vegas, and might call for the need of some property divestiture, resulting in extended negotiations and the possibility that the deal might not close for well over a year.

Option maven Larry McMillan cites this as the reason why Mandalay's January $65 calls expiring in 2005 are at $4.10 and the January $65 calls expiring in 2006 are offered at $5.30, even though as an all-cash offer, both could be worth $6.00 per contract.

The stock is trading today at $68.10. Obviously (aside from cost of money), the price discount and potential arbitrage between the 2005 and 2006 calls is an indication of the odds that the deal will not be approved and closed before January 2005. But as time moves on and the 2005 calls approach expiration, we should have a much clearer picture of the if, how and when this deal will play out.

One can, therefore, expect the spread between the two calls to narrow in the coming months. Still, with just a $1.20 spread price differential but a year of time between the two options, this play should only be considered by those that can do sufficient size, and are attuned to the nuances of arbitrage, for it to make sense.

Remember, like the companies involved, this is not a trade or bet. Instead, it assumes the house position in which one looks for a small statistical edge to capture a relatively risk-free, but slim, profit margin over time.

Steven Smith writes regularly for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He was a seatholding member of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) from May 1989 to August 1995. During that six-year period, he traded multiple markets for his own personal account and acted as an executing broker for third-party accounts. He invites you to send your feedback to

steve.smith@thestreet.com.