Currency Trading Information Channel
Option Arbitrage in the Forex Market
What is arbitrage? Arbitrage is the simultaneous buying and selling of identical financial instruments taking advantage of price discrepancies between different brokers, exchanges, clearing firms, etc. and thus locking in a profit. On paper, arbitrage is a risk-less trading strategy. In the real world however, risks abound.
So why trade arbitrage? Well, if the risks can be managed, arbitrage can be extremely profitable if you can find the opportunities and take advantage of the opportunities before they disappear. After all, the arbitrage opportunity is present because one side is slow to react to market news, momentum, etc. When it corrects the opportunity is gone.
Why arbitrage forex options? Well, because the opportunity exists if you look far it. The forex market is a cash inter-bank / inter-dealer market. In simplest terms, this means the foreign currencies traded in the forex market are traded directly between banks, foreign currency dealers and forex investors wishing either to diversify, speculate or to hedge foreign currency risk. The forex market is not a "market" in the traditional sense due to the fact that there is no centralized location for forex trading activity and, therefore, trades placed in the forex market are considered over-the-counter (OTC). Forex trading between parties occurs through computer terminals, exchanges and over telephones at thousands of locations worldwide.
Therefore the forex market is not as efficient as the NYSE for example. Price discrepancies exist between trading platforms, clearing firms, banks, etc if only for a small period of time. Options pricing is also affected for the same reasons but since there are other components involved in pricing an option than just the price of underlying currency, they tend to exist for longer periods of time.
One of the most common causes of option pricing differences is the calculation of volatility. Volatility is generally the standard deviation measured over a period of time. Sounds simple enough right? Well, if compare the volatility measure across different forex option providers, you'll likely find differences as large as 2%. When you find this you have also probably found an arbitrage opportunity.
Now that you've found an arbitrage opportunity, how do you trade it? Well, that's a bit trickier and this article cannot possibly cover all the risks associated with pulling off the trade but I will list some issues you should consider.
First of all, are the options really the same? Are the contract sizes, expiration dates and times the same? American or European style?
You also need to consider execution risk. Will there be slippage. Will there be a time delay in getting filled. Is the market moving too fast?
Exit strategy, how are you going to exit the trade and still capture the profit? What happens if the options expire in-the money? Out-of-the-money? What if you get assigned a position on one option but not the other?
These are just a few of the issues one must consider when trying to profit from option arbitrage. The key to option arbitrage is not unlike any other trade -- planning and risk management. Plan the trade, manage the risks, and execute the plan and you will be successful.
MORE RESOURCES updated Mon. January / 20 / 2020
What is Forex... Coinspeaker
How To Succeed With Forex Trading NuWire Investor
Visual Tools to Understand Forex Trading Strategies NuWire Investor
State Street seeks buyer for Currenex currencies-trading system Financial Times
The Complete Beginner's Guide To Forex Trading The Tokenist
What is Margin in Forex? Securities.io
Forex Forecast: Pairs in Focus MENAFN.COM
Everything you need to know about forex trading in Africa Ventures Africa
China's currency swap deal with Zimbabwe could backfire Quartz Africa
BME: MEFF Launches xRolling FX, Its New Product For FOREX Trading Through The TRADINGVIEW Platform - Exchange News Direct
BME: MEFF Launches xRolling FX, Its New Product For FOREX Trading Through The TRADINGVIEW Platform Exchange News Direct
Trading Support and Resistance DailyForex.com
Sodinokibi ransomware plagues Travelex currency exchange as investigation continues: report - CyberScoop
Sodinokibi ransomware plagues Travelex currency exchange as investigation continues: report CyberScoop
BNP to set up e-currency trading platform in S'pore The Straits Times
8 Forex Terms Every Trader Should Know Finance Magnates
U.S. Says China Is No Longer a Currency Manipulator The New York Times
Forex Trading in Nigeria DailyForex.com
Best Forex Trading App of 2020 for iPhone and Android Emirates Business 24/7
Ryo Currency Trading Up 7.8% This Week (RYO) Tech Know Bits
Brexit - UK chancellor Javid has put a scare into EU bureaucrats, said the UK may break EU rules - ForexLive
Brexit - UK chancellor Javid has put a scare into EU bureaucrats, said the UK may break EU rules ForexLive
Onshore yuan was set stronger again today by the PBOC (cheaper for China to by more stuff offshore) - ForexLive
Onshore yuan was set stronger again today by the PBOC (cheaper for China to by more stuff offshore) ForexLive
Canadian dollar weakens amid risk currency moves will concern Bank of Canada The Globe and Mail
Week Ahead Currency Outlook For January 20-24 - Upcoming Economic Data Review, Foreign Exchange Rates, Analysis And Forecasts - Exchange Rates UK
Week Ahead Currency Outlook For January 20-24 - Upcoming Economic Data Review, Foreign Exchange Rates, Analysis And Forecasts Exchange Rates UK
How the political landscape of 2019 affected forex investors Times of Malta
Pound to Euro Outlook: Key Economic Data That Could Affect GBP/EUR Exchange Rates in the Week Ahead - Pound Sterling Forecast
Pound to Euro Outlook: Key Economic Data That Could Affect GBP/EUR Exchange Rates in the Week Ahead Pound Sterling Forecast
Ways to become a better trader Augusta Free Press
World shares slip on jitters over China-US trade deal Daily Inter Lake
Is Australia’s Largest Digital Currency Exchange Tagz A Solid Option For Trading? - Bitcoin Exchange Guide
Is Australia’s Largest Digital Currency Exchange Tagz A Solid Option For Trading? Bitcoin Exchange Guide
Forex Trading is on the Rise in Africa Africa.com
Forex Trading for Beginners Yahoo Finance
USD/JPY: Further Strength Likely Targeting 110.68/71 Ahead Of 111.15/61 - Credit Suisse - Forex Crunch
USD/JPY: Further Strength Likely Targeting 110.68/71 Ahead Of 111.15/61 - Credit Suisse Forex Crunch
AUD/USD: Australian Dollar Weaker Post Chinese GDP Data Currency Live
Volcanic opening to Australian wool auction Queensland Country Life
Learn How to Trade Bitcoin Most Comprehensive Quick Start Guide Programming Insider
Top 5 Reasons Why You Should Start Forex Trading Business Review
Stories of have-a-go forex trading heroes belie a quiet market Financial Times
Top Four Forex Trading Mistakes to Avoid NuWire Investor
Forex And Cryptocurrency Forecast Action Forex
How does the currency market work? NuWire Investor
What is forex trading and why it is going strong in 2019? Business MattersBusiness Matters
How to Invest in Forex | The Smarter Investor | US News U.S. News & World Report
What Is Forex Trading and How Does it Work? - RushPRnews.com
Your first 5 minutes as a forex trader ForexLive
How to get started with Forex Business MattersBusiness Matters
How to Make Money on the Forex Market BBN Times
Hong Kong shares slide after weekend violence MarketPulse
Retail forex trading set to go live today Economic Times