Arbitrage 
Arbitrage in the securities market often connotes that one is buying something in 
one marketplace and selling it in another marketplace, for a small profit with little 
or no risk. For example, one might buy XYZ at 55 in New York and sell it at 55¼ in 
Chicago. Arbitrage, especially option arbitrage, involves a far wider range of tactics 
than this simple example. Many of the option arbitrage tactics involve buying one 
side of an equivalent position and simultaneously selling the other side. Since there 
is a large number of equivalent strategies, many of which have been pointed out in 
earlier chapters, a full-time option arbitrageur is able to construct a rather large 
number of positions, most of which have little or no risk. The public customer can­
not generally operate arbitrage-like strategies because of the commission costs 
involved. Arbitrageurs are firm traders or floor traders who are trading through a 
seat on the appropriate securities exchange, and therefore have only minimal trans­
action costs. 
The public customer can benefit from understanding arbitrage techniques, even 
ifhe does not personally employ them. The arbitrageurs perform a useful function in 
the option marketplace, often making markets where a market might not otherwise 
exist (deeply in-the-money options, for example). This chapter is directed at the 
strategist who is actually going to be participating in arbitrage. This should not be 
confusing to the public customer, for he will better understand the arbitrage strate­
gies if he temporarily places himself in the arbitrageur's shoes. 
It is virtually impossible to perform pure arbitrage on dually listed options; that 
is, to buy an option on the CBOE and sell it on the American exchange in New York 
for a profit. Such discrepancies occur so infrequently and in such small size that an 
option arbitrageur could never hope to be fully employed in this type of simple arbi­
trage. Rather, the more complex forms of arbitrage described here are the ones on 
which he would normally concentrate. 
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