Generally speaking , profits are usually accompanied by risks, but some strategies specifically look for loopholes or inefficiencies in the market, so that the strategy itself does not need to bear risks (that is, the strategy will not lose money), but can generate profits. The field we call "arbitrage".
Today there will be pictures and videos explaining the concept and practical operation of arbitrage in plain language, and will take you to find the arbitrage opportunities that institutional investors love most, so that retail investors can easily build their own arbitrage strategies!
Here is a picture to let everyone see what a real option arbitrage opportunity looks like, and the next article will explain it in detail.
What is Arbitrage?
Arbitrage refers to a trading strategy that takes advantage of price or interest rate differences in different markets to obtain risk-free profits.
In the process of arbitrage, traders buy assets in the low-priced market and sell the same or similar assets in the high-priced market at the same time, and the profit obtained is the price difference.
The origin of arbitrage can be traced back to the Middle Ages, when merchants profited from differences in the exchange rates of bills in different regions. Arbitrage can be used as one of the self-regulating mechanisms of the market to reduce price differences between different markets or varieties.
Therefore, arbitrage can be said to be an extremely important part of maintaining market efficiency, and it also provides reasonable economic incentives for market participants to voluntarily engage in arbitrage behavior.
Common Arbitrage Strategies
In the cryptocurrency industry, our common arbitrage strategies can be roughly divided into the following three types:
1. Futures and spot arbitrage: buy spot and sell corresponding futures commodities (or vice versa) at the same time, and earn profits from price differences.
2. Cross-market arbitrage : profit from the price difference between different trading markets.
3. Option arbitrage: Similar to futures and spot arbitrage, but there are more option commodities in the commodity selection, and the underlying exposure risk is also offset by long and short, and simply earn a risk-free profit from the price difference.
But outside the currency circle, there are more and more complex arbitrage opportunities, such as convertible bond arbitrage (Convertible Arbitrage), dividend arbitrage (Dividend Arbitrage), merger arbitrage (Merger Arbitrage), etc. .
And these arbitrage opportunities are basically only available to institutions in traditional finance, but there are not too many participants in the currency circle and blockchain industry, so the market efficiency is not so high, and even retail investors have the opportunity to arrange arbitrage Strategy.
For example, the "moving bricks" we often hear in the currency circle is actually an arbitrage strategy. As long as you have this knowledge in the currency circle, you can earn money that others cannot make. Now option commodities are in this dividend stage.
Then we will enter our main event today: the manual arbitrage opportunity analysis of cryptocurrency options!
In addition, friends who are interested in arbitrage strategy or history can search online: Flash boys, the book fully introduces the process of high-frequency arbitrage trading and various arbitrage opportunities when electronic trading first became popular. 
# Cryptocurrency Options Arbitrage Opportunities
In this part, I use the BIT exchange as an example, because their USD-based options products are rapidly expanding, and the market-making strategies of market makers give us an opportunity, so I recorded it to share with you.
As for the opportunities of the entire cryptocurrency options industry, especially the arbitrage strategy discussed today, in my previous article " Decryption｜How do institutions use options to harvest retail investors?" <2> Miaoknow Option Transaction Data ” has detailed descriptions, so I suggest you check it out first.
The following is the opportunity and process for me to manually arbitrage TON option commodities on the BIT exchange.
It can be seen from the video that we arbitrage call options (Calls) with the same commodity, the same expiration date, and different exercise prices. The principle is to use the pricing error between two different exercise prices to Position exposure is offset to achieve a situation of no risk but profit.
But it should be noted that the risk-free mentioned here refers to the price direction risk, but there are still individual risks such as the collapse of the exchange or the blockade of all cryptocurrencies, but we are still used to call it a risk-free arbitrage strategy in trading.
Why does this arbitrage opportunity arise?
Money falling from the sky like risk-free profit sounds like it shouldn’t happen, or it should be snatched up as soon as it appears, so most people subconsciously feel that this kind of opportunity is not our turn to earn.
But the fact is that such opportunities still exist in the currency circle. In this part, we divide them into the following three roles to discuss. Why do these opportunities exist?
- Market makers: It may be that the Liquidity of the market makers' hedging targets is not enough, so they cannot accurately select the correct parameters. It is also possible that market makers are still not familiar with new products and are still testing the parameter settings of strategies, and we catch arbitrage opportunities before the adjustments are completed.
- General traders: There are traders in the market who are eager to buy and sell option commodities, but they do not have the knowledge base of options. Or simply eager to trade, admitting compensation and selling positions in exchange for Liquidity.
- Market: Different exchanges have different participants, and their prices are different, and the behavior of moving bricks between exchanges is not active. Perhaps relatively few people know how to move options, and there needs to be a basis for pricing.
How to arbitrage?
Back to the most fundamental principle of arbitrage, in fact, there are only two major principles:
- Know the absolute value of the subject matter
- Lock in the relative value of each contract
If you know the absolute value of the subject matter, you can compare it with the current price. If there is a gap in the price, you can directly buy or sell short, and wait for the value and price to converge to earn an intermediate value.
But usually it is difficult for us to know the absolute value of a commodity, so we will assume that the price of the commodity on the most Liquidity is the absolute value, and the next step is to find the prices of different exchanges or different derivatives. Whether it is different from the absolute value, if there is a pricing deviation, after deducting the cost, the remaining price difference is an arbitrage opportunity.
To sum up, when you have "same exposure" but "different prices", as long as you can buy low-priced goods and sell high-priced goods at the same time, if the deduction cost is greater than 0, it is a risk-free arbitrage strategy.
What arbitrage opportunities may exist in the future
As mentioned in my previous article, the development of cryptocurrency options will go through 3 stages:
1. Inefficient early market price discovery
2. Arbitrage opportunities emerge in the mid-term development process
3. Arbitrage opportunities in mature markets disappear
Further reading: Investment Science｜What are the Delta, Gamma, Vega, THETA that traders often say? Institutional possession concept of option
We are currently at the end of the first phase, and the second phase will be when arbitrage opportunities explode. For example, various exchanges have discovered that after opening option casinos can earn enough fees, existing exchanges will rush to share this A big pie, this part is slowly taking shape.
The next step is to launch a bunch of new option targets, which will lead to the situation in this article that the coin market maker just listed is not ready, and this situation occurs in many exchanges.
At that time, there will be many opportunities for the prices of different exchanges, different expiration dates, futures, and on-chain to intersect with each other, and the price gap will be too large, so now and at this moment is the time for us to understand options and arbitrage best time.
epilogue
This article will introduce you to what arbitrage is, and actually show you a cryptocurrency option arbitrage strategy that can be operated even by retail investors. Finally, it will provide you with specific instructions on how to formulate arbitrage strategies and preparation directions, so that you can gain and institutional investors in the cryptocurrency industry Same opportunity.
It is recommended that you register the exchange first, do some small transactions to familiarize yourself with the transaction mode and interface, and wait until the opportunity arises so that you will not watch him pass by. Here is the BIT exchange preferential registration link (registration code: ILMK5TD) , can help you save 30% of transaction fees.
You can also refer to this article: " Teaching in Hands｜A must-read for beginners in option trading! <3> Take you from 0 to complete the first option transaction ", step by step guide you through the somewhat cumbersome registration process.
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(This article is authorized by the author JZ Invest, the author's point of view does not represent the position of the dynamic zone.)
