Quote from candletrader:
1) Arbitrage trading e.g. index futures arbitrage, convertible arbitrage etc... the primary risk here is execution risk on both legs... assuming execution goes off OK, the profits here are risk free... for example, the basis spread on a stock index futures arb is mean reverting, so you are guaranteed of risk-free profits IF you can get adequate execution on each leg and on each side...
2) Spread trading e.g. intramarket spread, interexchange spreads, intermarket spreads... unlike arbitrage trading, this strategy has more risks, since both legs can go the "wrong way"... however, often risk is less than taking outright positions and spread trends can be usefully created even when the underlying instruments are chopping around... another thing is that a well-thought out spread will circumvent stop-running phenomena on the underlying contracts, since the risk in a spread trade is not directional, but relational....
This thread will hopefully generate some debate and be educational for all... [/B]
