Arbitrage strategies generate a theoretically risk-free gain by simultaneously buying one security for a price which is lower than it can be sold for.
Arbitrage strategies are by no means limited to Options and they can be performed with almost any kind of financial instrument.
Arbitrage represents a temporary market inefficiency. In the case of Options, it is usually where Put-Call Parity has diverged and the relationship no longer holds true. Volatility skew (the tendency for Implied Volatility to change over different strike prices) can also generate arbitrage opportunities.
This state usually does not last for a significant length of time. Arbitrage tends to be far more difficult to successfully execute on widely traded financial markets like Options because High Frequency Trading (HFT) algorithms identify them before human traders have an opportunity to exploit the Short-term price inefficiency.
The Box Spread and some Collar strategies that take advantage of dividends in the Underlying stock are classed as arbitrage.
Contributed by: Ralph Windsor
Arbitrage strategies are by no means limited to Options and they can be performed with almost any kind of financial instrument.
Arbitrage represents a temporary market inefficiency. In the case of Options, it is usually where Put-Call Parity has diverged and the relationship no longer holds true. Volatility skew (the tendency for Implied Volatility to change over different strike prices) can also generate arbitrage opportunities.
This state usually does not last for a significant length of time. Arbitrage tends to be far more difficult to successfully execute on widely traded financial markets like Options because High Frequency Trading (HFT) algorithms identify them before human traders have an opportunity to exploit the Short-term price inefficiency.
The Box Spread and some Collar strategies that take advantage of dividends in the Underlying stock are classed as arbitrage.
Related Directory Entries
External Links
Arbitrage Strategies and Price Relationshipshttps://discoveroptions.com/mixed/content/education/articles/arbitragestrategies.html
Discover Options education article about arbitrage and options. As explained in the item, the most useful aspect of learning about options arbitrage for most traders is to better understand the pricing dynamics of these instruments.
View Discover Options in Options Market Glossary Directory
Volatility arbitragehttps://en.wikipedia.org/wiki/Volatility_arbitrage
Wikipedia article about volatility arbitrage using options.
Put-Call Parity And Arbitrage Opportunityhttp://www.investopedia.com/articles/optioninvestor/05/011905.asp
Investopedia article explaining the use of synthetic positions to exploit potential arbitrage options opportunities.
Taking Advantage Of Options Arbitragehttp://www.options-trading-mastery.com/options-arbitrage.html
An item which gives an overview of the various arbitrage opportunities with options strategies.
Option Arbitragehttp://www.optionstar.com/aa.htm
Option Star article describing the different forms of options arbitrage.
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