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Course: Finance and capital markets > Unit 9
Lesson 1: Put and call options- American call options
- Basic shorting
- American put options
- Call option as leverage
- Put vs. short and leverage
- Call payoff diagram
- Put payoff diagram
- Put as insurance
- Put-call parity
- Long straddle
- Put writer payoff diagrams
- Call writer payoff diagram
- Arbitrage basics
- Put-call parity arbitrage I
- Put-call parity arbitrage II
- Put-call parity clarification
- Actual option quotes
- Option expiration and price
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Arbitrage basics
Arbitrage is taking advantage in price differences to earn a profit. In this video we explore arbitrage opportunities in options markets. Created by Sal Khan.
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Great Video ! ! ! It's just simply like the basic "Cheap Buy - Expensive Sell" technique that were used by traders back in the antiquity. My question is: do suppliers of Market 1 - the $1 apple Market - realize what's going on with their apples ? An when they realize that people are willing and able to afford higher price of the exactly identical apples somewhere else, regardless of the traders' actions, would the suppliers in Market 1 raise their current apple price also ?(3 votes)
More than likely yes. In the example that Sal uses apples, the person profiting from the arbitrage opportunity may have access to a market that the individual who is selling their product for less does not. So you can think of the individual profiting from the arbitrage opportunity as someone creating additional demand for the original seller, which is why they are still selling it for the cheaper price.
Although, the additional demand can present the opportunity for the original seller to increase his price, which is why arbitrage opportunities are only present themselves for a short amount of time to most individuals.(3 votes)
So does that mean when the law of one price is violated there are arbitrage opportunities?(2 votes)- Yes, as long as the cost of conducting the arbitrage is less than the price difference.(2 votes)
Where do I access these markets? Who do you reccomend? TD Ameritrade work best?(2 votes)
Is this the same as binary trading ?(1 vote)
No, this is not binary trading. Binary trading is where an investor bets on whether the stock will be above or below a certain price. Arbitrage is where you are taking advantage of an imbalance in the market, which will give you a risk-free profit.(3 votes)
- hi, wouldn't that be Q-demand going down and Q-supply going up, since more suppliers we have in market B which means competitive, and people are willing to buy apples in other market instead in market A(0 votes)
- Hello, I am in South Africa. Where does one start in applying the arbitrage principle to Eurocurrency loans where you have interest rates in two countries and exchange rates in the two countries?
Thanks(0 votes)
Realistically it's incredibly hard for individuals to exploit arbitrage on financial markets. HFT firms have much faster access to data and algorithms which help them exploit this.(1 vote)
Video transcript
The word arbitrage
sounds very fancy, but it's actually
a very simple idea. It's really just
taking advantage of differences in price on
essentially the same thing to make risk-free profit. So let's just think
about a little bit. Let's say in one part of town
there's some type of a market. Let's say it's a
market for apples. And let's say in
that market, apples sell for-- just
make up some price. Let's say that apple's in
that market, sell for $1 an apple, $1 per apple. And let's say in another part of
town, you have another market. Another market's
literally a fruit market. And in that other part of town,
apples sell for $1.50 an apple. And we're going to assume
that these apples are completely identical apples. How could you take advantage
in this price difference on these identical things
to make a risk-free profit? Well ideally, you would want
to sell apples in the more expensive market where you
could get $1.50 per apple. And you would want to buy apples
in the less expensive market where you can get
them for $1 per apple. And that's exactly
what you would do. You would go do this market
over here, you would buy apples. Let's say you buy
10 apples for $10. And then you would go
maybe ride your bicycle a couple of blocks to that
other market over there. And you would sell
your 10 apples. So this is buy 10
apples for $10. And then you would sell
those 10 apples for $15. And so you would make an
immediate risk-free profit of $5. You're buying for
10, selling at 5. And you could just keep doing
that over and over again. And on every trip as many apples
as your bicycle could carry you'll just continue
to make money. And so this is
what arbitrage is. And just imagine a side effect. If someone did this
enough, then what would do is it would increase the
supply of apples here. So supply would
increase in this market. And on this market,
the demand would increase because
there's someone who just keeps buying
from this market and selling into that market. So what's eventually going to
happen when demand increases, the price will go
up in this market. And when the supply
increases in this market, the price will go down. So in theory, the
more you do this, the more that you're going
to make these prices come closer to each other. And eventually, you won't be
able to make any profit at all. But while there's
this discrepancy, you have an opportunity
for arbitrage.