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The great attraction of arbitrage buying

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Category: Futures Trading

Briefly : one man's up-development is another man's down-trend, and each can change path at any time.  Sorry.

The great attraction of arbitrage buying and selling is that it is intrinsically less risky than bizarre trading, as a result of you aren't betting in the marketplace rising or falling. Arbitrage buying and selling usually involves two related markets - you simultaneously buy one and sell the other. Thus your danger is restricted to the relation between the 2 markets.

Most commonly, arbitrage buying and selling is between the cash market and the futures market of a given index. Suppose, for example, the money Footsie is buying and selling at 5,000 while a futures contract due to expire three months from now could be buying and selling at 5,050, representing a 1% premium on the cash market to reflect the cost of money.

With the cost of money at four% p.a., this difference of 1% could be roughly truthful worth*.  In this case, there would be no significant arbitrage opportunity. But at any time when markets rise or fall sharply the futures tend to overshoot, giving rise briefly to an arbitrage buying and selling opportunity.  
U.S. Government Required Disclaimer - Commodity Futures Trading Commission

Futures and Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don't trade with money you can't afford to lose. This is neither a solicitation nor an offer to Buy/Sell futures or options. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this web site. The past performance of any trading system or methodology is not necessarily indicative of future results. CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN. All trades, patterns, charts, systems, etc., discussed in this advertisement and the product materials are for illustrative purposes only and not to be construed as specific advisory recommendations. All ideas and material presented are entirely those of the author and do not necessarily reflect those of the publisher or Tradewins.