Arbitrage Basic Points Arbitrage (often abbreviated as arb) is a trading technique where risk is attempted to be eliminated entirely. Generally, this would be achieved from discovering mispricings. Market makers do not like to be the counterparty to arbitrage and will make it difficult by increasing the bid/ask spreads on anything identified as an arbitrage strategy. Expert: Examples of Arbitrage Examples of option arbitrage strategies are [vertical] box spreads and [horizontal] jelly rolls; these strategies exploit put-call parity by finding slightly-mispriced synthetic equivalents. Most of the time, there is always hidden risk, which makes it more accurate to refer to such techniques as pseudo-arbitrage. One example of this would be statistical pseudo-arbitrage (stat arb) in which one application would be to bet on convergences after a positively correlating pair diverges by at least a couple standard deviations. But in a situation like that, the pair trade could keep diverging despite a perceived statistical edge (competitive advantage). In reality, many of these so-called arbitrage techniques come with their own form of tail risk (2+ standard deviation moves), among which could be due to unexpected variables such as currency default or a sudden collapse in liquidity–where the bids and offers widen and even sometimes disappear. Related articles Assignment Back Month vs Front Month Analog 0DTE JPM Collar