In finances, arbitrage is the process where you exploit price differences in different markets by buying in one market and selling in the other. In terms of binary options, this means that the same binary option is priced differently on separate markets, as their probabilities of success are calculated differently. By acquiring them at a lower price at one market and immediately selling them at a slightly higher price at the other one, a shrewd trader can net a nice profit for a few second’s work, and at hardly any risk at all. At the end of it all, you have no binary options, stocks or commodities to worry about – just instant, gratifying, easy money. What could be better? Actually, there is something: if you somehow manage to circumvent the broker’s fee, the profits are even higher.
Arbitrage through options
Ordinary options offer linear, variable payout, unlike binary options whose payout is fixed – a 70 dollar binary option will either result in a 30 dollar profit or 70 dollar loss. However, you can combine more diverse financial products and do some arbitrage through regular options; the assortment of binary options arbitrage is less colorful, though just as profitable, provided you play your cards right. But then again, in order for arbitrage to function as it should, the underlying financial products have to be similar enough – including the payoff. This makes the larger assortment of vanilla options a double-edged sword: you have more arbitrage choices, but they are consequently more difficult to pair up properly.
However, the same could be said for the lack of variety of binary options when it comes to arbitrage possibilities. You are more likely to have trouble finding anything (at all) to pair up with binary options, rather than finding the counterpart that matches ideally. If nothing else, with binary options, arbitrage is either quicker, or impossible – at least it will save you time. It is sometimes more beneficial to locate and exploit discrepancy within a single market. You realize a binary option is underpriced, so you acquire some and wait for market to correct itself before selling them off.
The thing about financial markets is that, even when they are closed, thing happen that can and will influence them once they are open – such things can be predicted and exploited as well. Every time something significant happens after a market closed will leave ample room for speculation on how that market will react upon reopening. Prices usually fluctuate rapidly and wildly during the first few minutes (sometimes hours), so this creates a great opportunity for some market arbitrage. Just buy low and sell high and you can’t go wrong.
Both regular and binary options have advantages and disadvantages, but when it comes to arbitrage, none of this matters as you are not going to hold on to them anyway. The best one is the one you can re-sell best, pure and simple.