- The Best Brokers For Arbitrage
- Binary Options Explained
- How Arbitrage Works
- Time Based Arbitrage
- How to Get Started
- Benefits of Binary Options Arbitrage Trading
- Risks of Binary Options Arbitrage Trading
- Bottom Line
- What Are Binary Options?
- What Is Arbitrage Trading?
- Is Arbitrage Trading Legal?
- What Is Market Correlation?
- Is Arbitrage Trading Risk-Free?
Binary options arbitrage is a trading strategy that involves the simultaneous buying and selling of the same asset to profit from any price difference. Investors typically execute many high-value trades over a session to generate returns. This guide to binary options arbitrage explains how it works, plus the benefits and risks. We’ve also included a guide for beginners.
The Best Brokers For Arbitrage
Binary Options Explained
Binary options contracts are a form of financial betting that follow an all-or-nothing approach. Traders must answer whether an underlying asset will finish above or below a certain value when the contract expires.
If the trader’s prediction is right, they receive a pre- determined payout. If their prediction is wrong, they lose the invested funds.
Binary options contracts are available on multiple markets, from currencies and stocks to precious metals and cryptos.
There are various types of binary options products, including high/low, range/boundary and touch/no-touch, amongst others. Importantly, arbitrage strategies can be applied to most types of contracts.
How Arbitrage Works
At its most basic level, arbitrage systems aim to profit from a difference in price for the same asset across two or more markets.
Let’s look at an example: say the price of a stock on one exchange can be bought for $100, while on a different exchange, it is selling for $102.
If the trader bought the stock on the first exchange and sold it on the second, they would make a $2 profit (minus any broker fees).
Of course, this assumes that the two trades are executed at the same time. As a result, simultaneous executions are important, especially during periods of high volatility.
Arbitrage trading can also take place across more than two markets. A trader could convert Euros into US Dollars, US Dollars into British Pounds, and then British Pounds back into Euros, with the aim to exploit market inefficiencies across three major currencies.
It is worth pointing out that arbitrage opportunities can be difficult to find. This is because switched-on traders, looking to make a profit, will quickly equalize the price between the two markets.
Automated algorithms are also eliminating arbitrage opportunities increasingly quickly.
Volatility is your friend when trading binary options with arbitrage strategies. The more volatility, the easier it is to identify price discrepancies between the same security on different markets.
Time Based Arbitrage
As you have probably realized, timing is critical when binary options arbitrage trading. Let’s look at another example to bring that to life…
If good news about a stock trading on the NYSE comes out when the exchange is closed, the actual price of the equity will remain the same until the market reopens and the impact of the news is realized.
However, the binary options market for that stock will likely fluctuate based on the news even while the NYSE is closed. The change in value and subsequent volatility may lead to the binary options market going into overbought or oversold territory.
This creates opportunities for arbitrage traders because when the NYSE opens again, the price may stabilize and reflect the true value of the stock. This is often called “time-based arbitrage” because it involves waiting until the market discrepancy has been eliminated.
How to Get Started
Before you start binary options arbitrage trading, there are several considerations:
The first thing to note is that some financial regulators have banned brokers from offering binary options.
The European Securities and Markets Authority (ESMA), for example, prohibits the sale of retail binary options. Binary options are also banned on regulated platforms in the UK. In the US, binary options must be traded on regulated exchanges.
Fortunately, traders can turn to offshore brokerages to access binary options products. Some of our top picks include Quotex and Pocket Option. These trading platforms also support arbitrage strategies.
The next step is to work out what your binary options arbitrage strategy will be. Will you focus on two or more markets that are interconnected? Will you go for a time-based arbitrage strategy? We’d recommend using a demo account to test different systems and refine a technique that works for you.
Since market volatility can lead to different payouts at brokers, arbitrage traders may want to open accounts with multiple providers.
Access to more prices may mean greater opportunities.
With that said, keep on top of spreads and non-trading fees. Arbitrage opportunities usually offer limited individual profit potential, so you often need to trade in high volumes. This means that profits can be wiped out in commission rates and other fees.
Note, while trading brokers are increasingly offering commission-free accounts, costs are usually made up in higher spreads.
Benefits of Binary Options Arbitrage Trading
- If binary options trades can be executed simultaneously, arbitrage strategies can offer a relatively low-risk form of trading
- Trading algorithms and bots can be used to automate arbitrage strategies
- It’s an exciting and active form of online trading
Risks of Binary Options Arbitrage Trading
- Identifying arbitrage opportunities is challenging
- Slow trade executions can lead to losses
- Brokerage fees can eat into profits
Binary options arbitrage offers a fast-paced trading environment for aspiring investors. Strategies can also be implemented on multiple markets, including stocks, forex, cryptocurrencies and commodities. See our list of brokers that support binary options arbitrage trading to get started.
What Are Binary Options?
Binary options are trading contracts that typically involve a yes-no proposition. For example, whether the price of a particular asset, such as Apple stock, will be above a certain level at a particular point in time. Correct predictions result in a pre-determined payout while incorrect predictions result in the loss of the initial deposit.
What Is Arbitrage Trading?
Arbitrage trading is where a trader looks to profit from differences in price for the same asset across markets. Binary options arbitrage trading can be used to generate returns on currency, stock and crypto markets, amongst others.
Is Arbitrage Trading Legal?
Yes, arbitrage trading is legal. However, the selling of binary options is banned in some countries where regulators consider them a form of gambling. Fortunately, accounts can still be opened with offshore platforms. See our list of the best binary options brokers to start trading with a reputable firm.
What Is Market Correlation?
Market correlation looks at how the price of one asset may impact the price of other assets. There is usually a negative correlation between the price of gold and the US Dollar, for example. Understanding market correlation can inform binary options arbitrage strategies.
Is Arbitrage Trading Risk-Free?
Arbitrage trading may be labelled ‘risk-free’ by some traders; however, investors can still lose money. Poor trade executions and slippage, alongside high fees, can all negate profits.