Arbitrage option trading does it really exsist?
- Thread starter Foxtrader
- Start date
Cryptic and short answer, but yes. Mostly related to "mispriced" volatility in equity options and it ain't retail - you need to be fairly quick and have some real $$.
Arb. vol. products themselves - mostly trading the term structure and again quick and $$.
Not options directly, but convert arb. still has decent following - most arising from the lack of transparency in the market.
Another huge arb. done mostly here in Chicago and not options directly is CME futures and a bit of their options against the correlated ETFs. Getting more crowded all the time, because there is still decent $$ in it.
Mostly as things have become more multiply listed and electronic - the opportunities have become fewer.
Merger arb. still has a following, but too much risk for many.
Plus it doesn't always work - things that get out of whack can stay out of whack for a long time.
Probably more, but these are the ones we focus on.
Arb. vol. products themselves - mostly trading the term structure and again quick and $$.
Not options directly, but convert arb. still has decent following - most arising from the lack of transparency in the market.
Another huge arb. done mostly here in Chicago and not options directly is CME futures and a bit of their options against the correlated ETFs. Getting more crowded all the time, because there is still decent $$ in it.
Mostly as things have become more multiply listed and electronic - the opportunities have become fewer.
Merger arb. still has a following, but too much risk for many.
Plus it doesn't always work - things that get out of whack can stay out of whack for a long time.
Probably more, but these are the ones we focus on.
I guess 3 days before expry when someone sells a deep in the money 100 delta call under intrinsic and you immediately hedge with the underlying (and lift the otm at cab). That, along with conversion/reversals are about as pure arb as you can get. Maybe div arbs as well but that's more than I feel like writing about. But all these above gifts were always in tiny volumes.
I think the limited potential for doing pure arbs created an environment where the word became liberalized to represent a lot of trading that involves constant spreading for purposes of capturing gains and mitigating risk. That describes options trading pretty well, so I have always thought of it as "soft arb" trading.
Now call yourself a derivative trader when you are trading a linear product, and I'll laugh in your face.
I think the limited potential for doing pure arbs created an environment where the word became liberalized to represent a lot of trading that involves constant spreading for purposes of capturing gains and mitigating risk. That describes options trading pretty well, so I have always thought of it as "soft arb" trading.
Now call yourself a derivative trader when you are trading a linear product, and I'll laugh in your face.
I'm a derivative trader but I always trade linear products. Does anyone have any helpful advice for me?
lol
The more you study options prices the more you notice a small bargain here or there, but you have to have the capital to take advantage of it. There may even be a certain scanner that looks for arbitrage for you.
