Arbitration

sunandaC

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Arbitrage is the practice of taking advantage of a price differential between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices.


Arbitraging can be defined as the purchase and sale of similar options/underlying assets to take advantage of premium/price differences. Arbitrageurs are the third type of market participants. It involves locking riskless profits by entering into different transactions in two or more options simultaneously.

Illustration: there are several options spread under which one can lock arbitration profits by simply buying and selling options on the same commodity in order to pocket the difference in premiums.
 
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