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Module Units
- 1. Introduction To Greeks
- 2. Black Scholes Model
- 3. Introduction To Delta
- 4. Delta’s Relationship With Spot And Strike Price
- 5. Delta And Time To Expiry
- 6. Delta And Volatility
- 7. Delta Adds Up
- 8. Delta Hedging
- 9. Introduction To Gamma
- 10. Gamma’s Relationship With Spot And Strike Price
- 11. Gamma And Time To Expiry
- 12. Gamma And Volatility
- 13. Important Properties Of Gamma
- 14. Introduction To Theta
- 15. Theta’s Relationship With Spot And Strike Price
- 16. Theta And Time To Expiry
- 17. Theta And Volatility
- 18. Important Properties Of Theta
- 19. Rho
- 20. Introduction To Vega
- 21. Vega’s Relationship With Strike Price
- 22. Vega And Time To Expiry
- 23. Volatility
- 24. Volatility And Normal Distribution
- 25. Types Of Volatility
- 26. The VIX Index
- 27. Volatility Smile
- 28. Delta Neutral Hedging
- 29. Calendar Spread
- 30. Diagonal Spread With Calls
- 31. Diagonal Spread With Puts
- 32. Gamma Delta Neutral Option Strategy
- 33. Gamma Scalping Option Trading Strategy
- 34. Put Call Parity
- 35. Options Arbitrage
- 36. Conversion-Reversal Arbitrage
- 37. Box Spread
- 38. Conclusion
Options Arbitrage
In this chapter, we will learn ‘Options Arbitrage’. But what exactly is arbitrage?
Arbitrage is the opportunity to make risk-free profit by simultaneously buying an underpriced asset and selling it at market price.
Options arbitrage is the use of options to reap marginal risk-free profit by locking value created through violation of Put-Call Parity.
The only drawback of options arbitrage is that profitable opportunities are hard to come by and gets filled out extremely fast by computers and system trading used by financial institutions which monitor for such opportunities all the time.
An inequality in price of the security must exist for arbitrage to work. When a security is underpriced in another market, you simply buy the underpriced security in that market and then sell it at the market price in this market simultaneously to reap a risk free profit. A call option can be underpriced compared to other options of the same expiry or same options with different expiry. All these are governed by the principle of Put Call Parity. When this principle of Put Call Parity is violated, opportunities of options arbitrage comes into the picture.
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