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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.
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Contributed by: Ralph Windsor

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Put-Call Parity Arbitrage I

Theory video explaining Put/Call parity and its relationship to arbitrage for options.