The investing universe is full of opportunities, and every so often, a strategy comes along that is both safe and profitable, such as options arbitrage. Today, I want to take you through an intriguing case study of how I used options arbitrage to find a no-risk investment during a major corporate action – the planned acquisition of Infinera by Nokia.

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What Is Options Arbitrage?

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Options arbitrage involves leveraging price discrepancies in different markets or forms. It's like finding a pricing error in your favorite online store and using it to your advantage, except with stocks and options!

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Click to watch this video to learn more about INFA Arbitrage!

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https://youtu.be/xh4D6wafe8U

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The Real-World Scenario

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When I discovered the news of Nokia planning to acquire Infinera at $665 per share. Immediately, Infinera’s stock skyrockets from $520 to $626. Now, acquiring the stock at $626, hoping to sell at $665 if the acquisition is successful, sounds tempting but risky. Instead, examining the options market revealed a lag in adjustment compared to the stock prices – a perfect setup for arbitrage.

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Unveiling the Arbitrage Opportunity

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In our example, upon perusing the options chain for Infinera, I noticed something compelling. There was an available option strike at $2, expiring on July 19th with a premium price of just $2.76. Let's break this down:

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- Purchasing this call option means you can buy Infinera stock at $2.

- Add the premium of $2.76 to the strike price, and your total cost per share equals $4.76.

- With the current stock price at $626, you might sense the discrepancy. However, note that there must be a substantial error in the option's pricing, or other unseen risks or factors, since having an effective stock price of $4.76 against a market price of $626 is highly improbable in logical market conditions. Such anomalies can signal mispricing or opportunities crafted by specific market conditions or news flows.

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How to Profit from Options Arbitrage?

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The trick in options arbitrage isn't just finding any opportunity but finding a true no-risk option. Here’s how it can work if applied correctly:

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1. Identify a Discrepancy: Like our Infinera case, find where the options and stock markets haven’t lined up.

2. Calculate Total Costs and Benefits: Add together all costs (premiums plus strike price) and compare this to the current stock price.

3. Execute the Trade: Purchase the option and, if viable, exercise it to acquire the stock at a below-market price.

4. Sell the Asset at Market Price: Turn around and sell the stock at the normal market price.

5. Pocket the Difference: Your profit is the gap between your total expense on the option (including the exercise value) and the sale price of the stock.

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Building Your Trading Skills

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Opportunities like this highlight why knowledge is power in the trading world. Each decision you make should be informed by rigorous analysis and a deep understanding of market mechanisms.

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In the world of stock trading, the diligent and educated investor often reaps the highest rewards. Whether optimizing compounding interest over time or capitalizing on immediate arbitrage opportunities, the right strategies and a keen eye for detail can transform your investing journey.

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Embrace Advanced Trading with Us

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If you find this intriguing and wish to delve deeper into sophisticated trading strategies like options arbitrage, consider joining our free Next Level Options Masterclass. It’s crafted for both budding and seasoned investors keen on elevating their trading game using strategies that mitigate risk while potentially providing commendable returns.

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[Next Level Options Masterclass]

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Additionally, for daily tips, market insights, and a community of like-minded traders, join our Telegram group. Exchange knowledge, stay informed, and discover new investment strategies that can aid in navigating even the most manipulated markets.

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Are you ready to step up your trading game and explore risk-adjusted strategies that can offer more than just potential profits but a comprehensive skill set in financial markets? Join us now and start your journey to becoming a masterful trader.