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==== ==== How to Master Stock Arbitrage ! ==== ====

Arbitrage trading occurs on all markets every day that the exchange is open for trading, most of us just aren't aware of these unique opportunities. Arbitrage opportunities are not available for long, often only seconds but they allow the trader the opportunity, if speaking of arbitrage in its purest form, to make a riskless profit by simultaneously buying and selling the same or similar securities. Identifying these opportunities in order to take advantage of them is the challenge. Arbitrage trading opportunities become available when the price of a security is different from the same or similar security on another market. For example a stock may react to news resulting in a price increase per share, at the same time there may be call options available on the stock that have not been repriced yet. The trader would sell the higher priced stock and purchase the call options, this allows the trader a risk free profit of the amount between the sell price and the buy price. Another example of a common arbitrage trading opportunity is between the S&P 500 stocks and S&P 500 futures. Often there is a disparity in the price between the two as the stocks trade on the NASDAQ and NYSE while the futures trade on the CME. If the S&P500 stocks get ahead of the futures the trader will sell the stocks and buy the futures, again making a risk free profit. These opportunities usually only last a few seconds. In order for one of the above two arbitrage trading opportunities above to become available one of the below conditions must be violated: 1. The same security must trade at the same price on all markets. 2. Two securities with identical cash flows must trade at the same price. 3. A security with a known price in the future (via a futures contract) must trade today at that price discounted by the risk-free rate. As you can see arbitrage trading opportunities are quite straight forward but discovering an opportunity is much more complex. This often results in riskless arbitrage not being available to the average retail investor. Also although these strategies seem easy to identify in theory executing them in the real world is very difficult. Many institutions posses complex and expensive trading software that allows them to take advantage of these types of opportunities. There are however several risk arbitrage opportunities that offer the trader the potential for profit. Good luck in your pursuit for risk free profits!

This article was written by Andi Sachs. For more articles like this one visit us at Options Trading Guide or Stock Market Investing Guide!

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==== ==== How to Master Stock Arbitrage ! ==== ====

Use arbitrage trading when a stock gets ahead of the futures