Generate Income Trade Options

Arbitrage opportunities appear here and there, all the time in the financial markets. Pure 100% risk-free arbitrage is hard to spot, however it is essential to understand how the markets offer this opportunity, and then apply similar principles on other trades, where there’s risk, but is very little, or there’s no risk at all! In both cases, both the 100 risk-free arbitrage trades and the extremely low risk/reward trades, the option trader has to look beyond the obvious and uncover the real opportunity. Looking beyond the obvious is important, because we cannot tell by just looking at a bunch numerical data if there’s an arbitrage opportunity or not.
Before we move to options, let’s see how arbitrage works in sporting events, such as horse racing.
By combining the best odds, from several different book makers, we have the following cases: 

                                          Odds at race 1                                          Odds at race 2

Horse A                                      2                                                                  1.9

Horse B                                     3                                                                    6

Horse C                                      5                                                                    9

Horse D                                     12                                                                  11

And now I ask you, can you figure out which of the two races offers an opportunity for an arbitrage profit?
The fact is that race 1 loses money, even with the best distribution possible you would always lose 11.6%.  Race 2 however does offer an arbitrage opportunity, and to be exact, it makes 11% of profit, no matter which horse wins the race. I did use a formula to figure out if there’s a profit margin or not, and I also need another formula to figure out how much money exactly I’d have to bet on each horse, in order for my arbitrage equation to hold true.
It’s similar with options, there are so many numerical data, that are beyond an easy calculation, let alone a simple observation. Arbitrage is not about fooling one option broker, is simply about exploiting the whole system of brokers, who collectively appear to you as a risk-less trading platform. That is, one trade’s risk is offset by another trade’s reward placed on the same underlying stock, at a different option broker or using a different kind of option trade! 

Common option arbitrage techniques 

Overbought –oversold:

One common arbitrage strategy is to spot a market, such as two highly correlated stock indices, or actual stocks that every now and then fall out of sync. If one of the stocks rises too much while the other is lagging behind, it is almost certain that sooner or later they will fall back in synch with each other again! So the trader sells the overbought stock, while at the same time buying the lagging stock. The outcome of this is that the profit made on the winning trade will exceed the loss made on the losing trade.
This arbitrage strategy can be implemented in many instruments but option traders do it differently, when they detect an overbought-oversold relationship between an option and the underlying stock itself! This once again is an overlooked profit opportunity, and it means instant risk-less profit to the trader.

The Box Spread arbitrage strategy:

This strategy is more complicated and requires the creation of one Bull Call Spread, and one Bear Put Spread. Both spreads are vertical spreads, having the different strike prices and the same expiration dates. The idea is to pay less to make the spread, than the spread will be worth at expiration!
Assume that it’s March and that ABC stock trades at $45 and see the following options offered at those prices: 

     April 40 put - $1.50

April 50 put - $6

April 40 call - $6

April 50 call - $1

The Box Spread strategy requires doing the following:

Buy 1 ITM Call
Sell 1 OTM Call
Buy 1 ITM Put
Sell 1 OTM Put

So we buy the April 40 Call, (we spend $600), and sell the April 50 Call, (we get paid $100) that constitutes our bull call spread and costs a net $500.
And we also buy the April 50 Put (we spend $600) and we sell the April 40 Put (we get paid $150) That’s our bear put spread, and it has cost us $450.
The total cost for this Box Spread is 500+450=$950, but at expiry date it will be worth $1000!

 The Box Spread arbitrage concept:

No matter what happens the spread is always worth $1000, as you can probably tell… commissions costs have to be factored in as well, but with a big number of contracts and a combination of the best trades, from a variety of brokers, the Box Spread arbitrage opportunity is there!   
Some brokers charge a fixed fee per trade, regardless of contract size! There are brokers who will charge one $15 fee for this Box Spread trade, which is a 4-leg spread.
That leaves a sure fire profit of $35. But hey, you might as well trade 20 contracts instead of one, (per leg), and still pay only $15 in commissions. That leaves a sure fire profit of $700! 
In order to explore this and other similar arbitrage opportunities, as well as non arbitrage but still obscure trading opportunities, one has to use advanced market screening and simulation tools to test the idea using real market data. Analyzetrade.com offers not only these tools but also the ability to back test the idea, using real market data. But once the general idea has been tested you can also see, if using more than one option brokers could provide a better overall deal. Options contracts often become momentarily cheap or expensive because of instantaneous demand! The gap between Bid and Ask widens.
It is important to realize, that despite what some people say against arbitrage, it is real! It is a real and consistent profit opportunity that no one has explored in full! The market is big and enormously complicated that no single human being can fully observe and analyze. In fact, not even computer exists that would be so powerful, even brokers’ advanced computers only deal with a small portion of arbitrage and sure-fire trades. There are so many set ups, data, different dimensions that this data works in, and complexity, that it’s impossible for a single computer to know everything. All the computers do is satisfy the total market statistics, based on the whole market, so that premiums are priced as safely as possible for the brokers. But the smart trader is not about total market statistics, he’s about pinpointing two isolated events, combining them and making a trade on them.