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Arbitrage Trading Strategies

This article covers:

What do you mean by Arbitrage Strategies, and what are their types

Arbitrage trading strategies in India

What are Arbitrage trading strategies in options

Arbitrage stock trading

What do you mean by Arbitrage Strategies, and what are their types

Arbitrage is a process in which the buying and selling of commodities occur simultaneously but on different platforms. The main objective of doing so is to earn a good amount of profit in the short term. If the quantity you are buying and selling is huge, then there are chances to make huge profits. It is an entirely risk-free operation.

Some conditions should be proved true for Arbitrage to take place.

  • The price of an asset must be different in different markets

  • Two assets having the same cash flows are traded at different prices.

  • There is a considerable difference between the current and expected future prices.

If any of the above conditions are fulfilled, only then we can say that Arbitrage is possible. A trader must keep some points in mind while entering into the Arbitrage state of any stock:

  • The fees or cost of a transaction should be low to gain profit.

  • The commodity volume should be sufficient to bear the risk attached to it.

  • A trader should make the Transaction fast.

Below are the widely used Arbitrage trading strategies in the financial market.

  • Cryptocurrency

  • Triangular

  • Covered Interest

  • Uncovered Interest

  • Merger or Risk

  • Statistical

  • Index

  • Betting or Sports

  • Currency

  • Convertible

  • Futures

  • Capital Structure

  • Cash Carry

  • Fixed Income

  • Relative Value

  • Swap

  • Options

  • Gold

  • Tax

  • Negative

  • Latency

  • Rental

  • Credit Card

  • Regulatory

  • Volatility

  • Location or Spatial

  • Time

  • Yield Curve or Interest Rate

  • On The Run And Off The Run

  • Retail

  • Crude Oil

  • Multiple

  • Information

  • Riskless

  • Political

  • Institutional

  • Beta

  • Knowledge

  • Static and Dynamic

  • Quasi

Arbitrage trading strategies in India

There are many Arbitrage trading strategies in India used by the traders; they are either checked manually or by the software.

There are basically 3 main types of strategies used in India they are Pure Arbitrage, Merger Arbitrage, and Convertible Arbitrage.

Pure Arbitrage refers to the investment strategy described above. An investor buys and sells a security in different markets at the same time to leverage a price gap. As an outcome, the terms "arbitrage" and "pure arbitrage" are frequently interchanged.

Merger arbitrage is a type of Arbitrage that involves merging entities, such as two publicly traded companies.

Convertible Arbitrage is a type of Arbitrage involving convertible bonds, also known as convertible notes or convertible debt.

What are Arbitrage strategies in options?

Arbitrage strategy in options - Option arbitrage trades are used to generate small profits with little or no risk. It is the process of buying and selling the same commodity in two different markets. In Arbitrage option trading strategies, Put-call parties can be used to perform options arbitrage. A call grants you the right to buy, while a put grants you the right to sell. So, this is how the Arbitrage strategy in options works.

Arbitrage in stock trading

You can only make an arbitrage trade if you already have stocks in your Demat.

If the stock is trading at different prices on multiple markets, a simple Arbitrage stock trading strategy requires buying the stock at a lower cost on one exchange while selling it at a higher price. But as said before, Arbitrage stock trading works when you have a particular stock in your Demat account.

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