Currency Trading Information Channel |
|
|
|
Option Arbitrage in the Forex MarketWhat 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. John Nobile,
MORE RESOURCES updated Thu. April / 25 / 2024 Nigeria denies freezing over 300 P2P accounts on more crypto exchanges amid forex concerns CryptoSlate Prop Trading: YourPropFirm Taps Leverate to Enhance Services Finance Magnates Top 10 Forex Brokers in the World: 2024 Rankings FinanceFeeds Yen weakens past key ¥155 level, adding to intervention risk The Japan Times Stock market today: Asian benchmarks mostly slide as investors focus on earnings Yakima Herald-Republic How to get started in trading forex CNN Underscored Morning Bid: Japan's FX no-show, Meta plunges Reuters.com Where king dollar is causing pain the most Reuters.com Understanding the Correlation of Oil and Currency Investopedia Discover ask2bid.net: A Trusted Destination for Unbiased Insights into Crypto and Forex Trading Yahoo Finance Spotrade.net analysis: A Trusted Destination for Unbiased Insights into Crypto and Forex Trading Yahoo Finance Nigerians fear new crypto crackdown as currency drops 15% and officials blame more than Binance DLNews Zimbabwe authorities troubled by tumbling new currency Voice of America - VOA News Best Forex Brokers In April 2024 Bankrate.com Illegal forex trading: RBI cautions banks, customers The Indian Express Currency Crash: How Millennium Management Made $40 Million Betting Against the Egyptian Pound Yahoo Finance This Is How You Make Money Trading New York Magazine 3 Best Forex Brokers for 2024 NerdWallet CHF/JPY Forecast Today 25/04: Funding Currencies War (Chart) DailyForex.com Towards Increasing Complexity: The Evolution of the FX Market - Liberty Street Economics Liberty Street Economics - South Korea hopes currency reforms will move chunk of NDF trading to spot deliverables - Reuters.com Foreign exchange contact group (FXCG) European Central Bank Why Is the Forex Market Open 24 Hours a Day? Investopedia Forex Trading for Beginners NerdWallet Unauthorised forex dealers duping customers: Names of 75 forex dealers on RBI’s alert list The Economic Times FOREX.com vs. Robinhood: Which Is Right for You? The Motley Fool USD/JPY Analysis Today – 25/04: BoJ Concerns Peak (Chart) DailyForex.com China's New Currency Playbook Council on Foreign Relations AUD/USD, EUR/USD and GBP/USD regain lost ground IG International New data reveal forex supply shortage at official window as exchange rates plunged in 2023 Nairametrics Zimbabwe's new gold-backed currency sliding on black market Voice of America - VOA News How Often Do Exchange Rates Fluctuate? Investopedia GBP/USD Analysis Today 24/4: Avoiding Further Collapse DailyForex.com US, Japan and South Korea seek to limit dollar's rise Financial Times Trader's Case Tests DOJ's Policing of Global Currency Market The Wall Street Journal Top Fiat Currencies Used to Trade Bitcoin Investopedia Silver Forecast Today - 25/04: Show Signs of Support (Chart) DailyForex.com USD/JPY Analysis Today 24/4: Stable Intervention Levels DailyForex.com RBI urges banks for caution on unauthorised forex transactions The Economic Times How can blockchain platforms make currency trading cheaper? Financial Times USD/CAD Analysis Today - 24/04: Sentiment Re-Test (Chart) DailyForex.com Weekly Forex Forecast - 21/04 (Charts) DailyForex.com Trading Costs - Trading Charges FOREX.com EUR/USD Analysis Today 24/4: Gains Face Threat (Chart) DailyForex.com
|