What is Arbitrage Trading in Stock Market ?

What is Arbitrage Trading in Stock Market ?

What is Risk free model to work in stock market ?

What is arbitrage strategies in stock market. How to understand it.

How to learn arbitrage in stock market?

What is Arbitrage in stock market :-

Arbitrage means mispriced   between two market at a time. It might be due to so many reason. We understand with a example in live market.

Simple Market Example : Apple price in Delhi wholesale market is 60 Rs per kg buy in Gurgaon wholesale is 80 Rs. It can create a opportunity for a trader / merchant. Any one who in this business can buy from Delhi and sell in Gurgaon. He will earn 20 Rs per kg. But the all expenses related to transport and labor we have to cover from this 20 Rs only.

Stock Market Example : – Maruti Stock is trading 7100 in NSE and 7080 in BSE Exchange then the same opportunity is creating for earning. So only one condition that the participant must  have the excess for both market for trading. Even all the trading related expenses must be covered from this profit only. Profit ratio might be low but it can be increased by bulk quantity.

Types of Arbitrage in Stock Market : –

  1. Spot Market Arbitrage
  2. Cash and Future Market Arbitrage
  3. Options Trading Arbitrage
  4. Commodity Market Arbitrage
  5. Currency Market Arbitrage

Spot Market Arbitrage :- 

We already have discussed with Maruti Share in first column.

Cash and Future Market Arbitrage:-

                                                                 We people always pay for time value of money. Either in home loan, personal loan, Car loan etc. Same formula in being used in stock market. If we want to buy share in future then we also paying some cost of carry or time value of the money. In lemon language you have to pay extra then what you are paying today. We understand with a example : –

Stock Market Example : –

                                                  We have two separate market name equity market and Derivatives market in stock market trading. Its like Delhi market and Gurgaon market. Both have different price. Now supposed Delhi Market in for cash only if you want to buy the share you have to pay full in cash but Gurgaon market is Derivatives market where you have to pay only 10% of total amount right now buy full amount on a later date.

Delhi Gurgaon
Equity Market –  Cash Derivatives Market – Credit
Maruti Share Price Maruti Share Price
7090 7115

Above example is showing arbitrage opportunity for trader where trader can buy Maruti share in spot market can sell in future market. End of the month he will get the price matching as per the exchange rules of future expiry. Per share he can earn 30- 35 rupees but the cost of the transaction have to be deducted from profit. There is endless opportunity in stock market for such kind of the examples.

Formula to be used to identify Arbitrage opportunity :

Black Scholes Formula

Options Trading Arbitrage :-

                                                   It is advance level of arbitrage method but very cheap for execution in live market with minimum loss and maximum profit. But Everyone who want to enter here must have to understand complexities of the options trading strategy. Once you get expert in this then you no need to worry about the market ups and down. You can earn in any situation in the market.

We are sharing few model of Arbitrage in this market :-

  1. Put Call parity and Arbitrage Opportunity

  2. Strike Price Arbitrage Opportunity

  3. Box Spread Arbitrage

  4. Conversion & Reversal Arbitrage

 Participants in Arbitrage Market : –

Its seems Arbitrage market is in favor of institutional investors like mutual funds, FII, DII etc,   because of HFT trading access and transaction charges is so high, A retail investor is not able to grab this opportunity. But if we learn advance level options trading strategy and technical analysis of stock market then we can also earn from Arbitrage market.

Disclaimer : –

Investment in stock market is risky so please take expert advise before investment. Article is only for educational purpose only, ISFM – Stock market School is not responsible any kind of loss occur during live trading.


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