Options Arbitrage Opportunity

by NYSEguy
(New York, USA)

This kind of arbitrage seeks to profit from temporarily mispriced options. It works great in theory, but it's essentially impossible in practice (at least on exchanges in the United States). Here's why:

For starters, the SEC prohibits the trading of CFDs in the United States. That leaves only the possibility of the first example, the "expensive" way of acquiring a risk-free profit. The numbers given in the example yield a 0.73% profit (less commissions) on the initial investment of $61,350, for an annual return of about 9%. That's amazingly high for a zero-risk position.

You may be wondering why everyone isn't taking advantage of this great opportunity. The reason they aren't is that the example's option premiums are unrealistic. If you don't believe me, just look at an option chain for any stock. Consider the bid for any in-the-money call, and the ask for a put of the same strike price. Do you see how the difference in option premiums yields either a loss or a gain too small to cover trading commissions?

This is the case for retail investors/speculators like you and me because we don't have the resources to quickly identify and trade mispriced options. Institutional investors/speculators such as hedge fund traders rely on computer systems that are dedicated to finding such "market inefficiencies"; the high-volume arbitrage trades they then perform cause the option premiums to correct themselves in a matter of seconds. (I can't speak for CFDs, which I've never traded, but I'd be willing to bet that they are equally difficult to profit from for exactly the same reasons.)

One of the benefits of trading options is that you can take on as little or as much risk as you want to, and a simple strategy like a credit spread can yield decent returns with a comparatively small risk. Options are much more complex than they first seem, so please research them thoroughly and stick with virtual trading for a few months before risking your own capital.

Click here to post comments

Join in and write your own page! It's easy to do. How? Simply click here to return to Submit Articles.

Protected by Copyscape Online Copyright Search

Learn How to Profit with Options

Enter Your Email Below and Receive your FREE Reports

We respect your email privacy

Join Us on Facebook

option trading business

xtr pro trader

options trading pro system