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