What is Arbitrage Trading?
Arbitrage trading is buying or selling a security within the trading day that takes advantage of value differences withing the market the security is being traded in. Every day the stock market is open arbitrage trades are being made all throughout the day.
An arbitrage trader will purchase a security and sell the same security (or one closely related) at the same time. They attempt to profit off of the value differences in the different markets. They may use the difference between CME futures and the NYSE for their trade. Often when news or events occur it can move the index higher or lower. Both markets will not move at the same time or for as strong a move. They will be unequal in price for a given amount of time. This is where arbitrage traders attempt to make their profit.
The markets most often used for Arbitrage trading are the S&P futures in conjunction with the stocks of the S&P 500. On most trading days they will develop a lag or disparity between the pricing of the two. Often this occurs when the most highly trades stocks of the indexes or the NYSE and the NASDAQ develop lag time with the S&P futures. This can be either the stocks lagging behind the S&P futures or the S&P futures lagging behind certain stocks. The S&P futures are traded on the CME market.
An example of a good arbitrage trading is when a stock gets ahead of the futures in price and an arbitrage trader sells the stock and purchases the futures for the stock. The traders winds up holding a similar investment that they started with while taking profit on the price spread between the two markets.
There are other ways to make arbitrage trades as well. One of the easiest trades to spot is when a heavily traded company releases very popular news. The stock begins to rise in price on the NASDAQ as the traders are buying up shares of the company. While this is happening an arbitrage trader will buy call options for the stock on the AMEX if they are available. They will only buy if the call options have not begun to rise. By doing this the trader can make money when the stock rises on the AMEX to catch up with the price on the NASDAQ. This sounds easy in theory but the differences in price will only last for a few seconds. An arbitrage trader needs to be quick.
Learn more about arbitrage trading you can also check out arbitrage trading strategies visit if you trade penny stocks.
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Keep it coming, wrirtes, this is good stuff.
Full of salient pnotis. Don’t stop believing or writing!
Hi Datherine,
Arbitrage trading is simply the trading of securities when the opportunity exists during the trading day to take advantage of differences in value between the markets the trades are made within.
One of the most popular Arbitrage tradings is played with the S&P futures and the S&P 500 stocks.
One example of arbitrage trading is a company that releases good news in a press release. The stocks starts to trade higher on the NASDAQ, and there are call options available for the stocks on the AMEX which have not had any or little action or volume. If you jump on the options before they catch up with the climbing stock price you can make money by selling the stock and buying the options at the same time.
To your Forex Trading Success
Olav
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