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
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.
Senior Account Executive,
MORE RESOURCES updated Sun. August / 20 / 2017
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Crisis of Confidence in
The European Union (EU) constitution was dealt a double
blow, first by a French "no" vote on 29-May and then by a
follow on "no" from the Netherlands on 01-Jun. To add
insult to injury, one low level Italian diplomat quickly
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Stock Market Report: Day
Trading or Swing Trading Online? Stock Investing
Profitable day traders recognize that momentum trading is
among the fastest & most effective ways to harvest BIG
piles of cash in the stock market.The problem is that if
you don't know what stocks to look for and how to approach
them while limiting your risk, you won't even get close to
making some profits.
What are Forex signals? Forex signals are paid services
offered by some brokers and independent Forex annalists.
Companies that offer forex signals monitor and analyze the
market for you, providing you with their data via desktop
alerts, email or even SMS and pager alerts.
The Margin Advantages of
There is one aspect that is considered as one of the best
advantages of FOREX Trading. This is related to the amount
of money you need to place a trade, this is known as
"margin", and in short, this is all that can be lost in a
the case you had a bad trade.
Forex Trading -
Advantages and Disadvantages
What is Forex Trading? Forex, or Foreign Exchange, is the
simultaneous exchange of one country's currency for that of
another. This market of exchange has more daily volume,
both buyers and sellers, than any other in the world.
The Major Players in the
Foreign Currency Exchange Market - FOREX
Since the US dollar is the centerpiece of the market, it is
normally considered the 'base' currency for quotes. In the
"Majors", this includes USD/JPY, USD/CHF and USD/CAD.
Why Forex Traders Plan To
Fail Before They Even Place Their First Trade & How You
Can Know It & ...
Have you heard the wise saying that a trader who fails to
plan, plans to fail? I have, and I was once that trader!
However, did you know that even though traders who have
constructed a plan, which incorporates their trading
strategy (their "edge"), they have a plan that is likely to
fail? If we look at all traders who participate in the
market: we have one group that fails to plan and therefore
plans to fail; another group whose plan is failed; and a
third group who properly plans and therefore does not
fail. Is it any wonder that the success rate for forex
traders is so slim? Well it doesn't have to be.
5 Questions You Need To
Have Answered Before You Back-Test Your Forex
As 90-95% of new forex traders lose money within the first
3-6 months this article helps to guide new forex traders by
asking 5 questions that the forex trader needs to know
prior to back-testing their forex system.Let us jump right
The Forex Market-What, When and Why?Forex, FX and the Forex
market are some common abbreviations for the Foreign
Exchange market. Actually it is the largest financial
market in the world, where money is sold and bought freely.
ISO 4217 in Forex
ISO 4217 is an international standard describing three
letter codes to define the names of currencies established
by the International Organization for Standardization
(ISO).The first two letters of the code are the two letters
of ISO 3166-1 alpha-2 country codes (which are similar to
those used for national top-level domains on the internet)
and the third is usually the initial of the currency
Commodity Trading -
Advantages and Disadvantages
What Is Commodity Trading? Commodity futures markets allow
commercial producers and commercial consumers to offset the
risk of adverse future price movements in the commodities
that they are selling or buying. In order to work a futures
contract must be standardized.
Chinas New Currency
The base unit for the renminbi is the yuan, which is how
the Chinese currency is most commonly referred to. The
official ISO abbreviation for the yuan is CNY, but it is
also commonly abbreviated in the forex industry as RMB.
Option Arbitrage in the
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
A Beginner's Guide to
FOREX is the abbreviation for the Foreign Exchange market.
FOREX is basically an international exchange market where
currencies from all over the world are bought and sold for
Welcome to the World of
Indeed large multinational and individual banks and other
major financial institutions have dominated FX trading
(also known as Forex trading), but there is a paradigm
change in the nature and type of investing. According to
one estimate, in the new millennium, there are over 6
million online investment accounts, up from 1.
An Evaluation of the
A Minister of Finance is morally right to lie about a
forthcoming devaluation and a woman has the right to lie
about her age. This is the common wisdom.
Why Hedge Foreign
International commerce has rapidly increased as the
internet has provided a new and more transparent
marketplace for individuals and entities alike to conduct
international business and trading activities. Significant
changes in the international economic and political
landscape have led to uncertainty regarding the direction
of foreign exchange rates.
Momentum Trading: A
Practical Day Trading Strategy to Get Profits from Hot
Momentum day trading can be extremely profitable when done
The Yin and the Yang of
I am reading a fantastic book on trading, first published
in 1924, by Richard D. Wyckoff, titled "How I Trade and
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I read on a bulletin board a traders comment that on his
first outing trading the E-Mini S&P 500 he lost on each
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stop each of his trades would have been profitable and that
therefore he would be trading with a wider stop in future.
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