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17 optional arbitrageArbitrage is the simultaneous purchase and sale of identical financial instruments, taking advantage of price differences among various brokers, exchanges, clearing companies, etc. and, thus, making a profit. Theoretically, arbitrage is the least risky trading strategy. However, in reality, the risks are present in large numbers.

Why trade arbitrage?

When controlling risks, arbitrage can be extremely beneficial if you can find opportunities and take advantage of these opportunities before they disappear. In the end, arbitrage opportunities arise when one side does not hurry to react to market news, momentum, etc. When it is corrected, the opportunity disappears.

Why an options arbitrage on Forex?

If you look closely, there are good opportunities for arbitrage transactions. The Forex market is a cash interbank / inter-dealer market. Simply put, this means that foreign currencies traded on the Forex market are sold directly between banks, currency dealers and foreign exchange investors who want to either diversify their investment portfolios, or speculate or hedge their currency risks. The Forex market is not a "market" in the traditional sense, due to the fact that there is no centralized location for making deals and therefore transactions concluded in the Forex market are considered over-the-counter.

Currency trade between the parties of the transaction occurs through computer terminals, exchanges and telephones in a thousand different places around the world. Therefore, the Forex market is not as effective as, for example, the New York Stock Exchange. Price discrepancies arise between trading platforms, clearing firms, banks, etc., but only for a short period of time. The discrepancy in options pricing occurs for the same reasons, but since in addition to the price of the relevant currency there are other components involved in the option valuation, these discrepancies tend to exist for longer periods of time.

One of the most common reasons for the difference in the valuation of an option is the calculation of variability. Variability is the standard deviation measured over a period of time. Sounds simple enough, does not it? So, if you compare the measurement of variability among various sellers of currency options, then you will most likely find differences of about 2%. When you find such a difference, then consider that you have found an opportunity for an arbitration transaction.

How to trade in arbitration?

Now that you have found an opportunity for an arbitrage deal, you need to decide how to use it. This is somewhat more complicated than can be covered in this article, considering all the risks associated with the implementation of transactions, but we list some of the key points that you must take into account.

First of all, you must consider whether the options are the same between each other, the size of the contract, expiration dates, American or European style, etc.

You also need to consider the risks of execution whether there will be slippage, will there be a delay in execution, is the market moving too fast?

Exit strategy as you are about to exit the deal and still capture profits, what will happen if an option expires in cash (without money), that if you open a position on one option and do not open otherwise.

These are just a few points to consider when trying to make a profit on an options arbitrage. The key aspect for effective trading in options arbitrage is not much different from any other trading is risk management and planning. Plan a deal, manage risks and execute your trading plan. And you, in this case, can successfully use the emerging trading opportunities!