What is options arbitrage?

Arbitrage is the practice of buying an asset and then selling it immediately to take advantage of a difference in price. Options arbitrage involves the simultaneous buying and selling of options either between exchanges or the same exchange.

Where have you heard about options arbitrage?

Large financial institutions with sophisticated computers and software are the key participants in options arbitrage. Although small investors may have heard of the practice, they're unlikely to have been involved in it themselves.

What you need to know about options arbitrage.

To set up an arbitrage, an options trader would go long on an underpriced position and sell the equivalent overpriced position. If puts are overpriced relative to calls, the arbitrager would sell a naked put and offset it by buying a synthetic put. If calls are overpriced in relation to puts, they would sell a naked call and buy a synthetic call.

In practice, the opportunity for arbitrage in options trading rarely exists for individual investors, because price discrepancies often appear only for a few moments. The advent of automated trading strategies has also diminished the scope for options arbitrage.

Find out more about options arbitrage.

Check out our guides to options and arbitrage to explore this fascinating area of trading.