What is arbitrage? What is arbitrage 100, what is arbitrage 90? How to profit from them in trading?

Let us discuss.

Arbitrage 100 means buying an index Fut of one month and selling the same index Fut of other month

Arbitrage 100 in case of Nifty will be

Buy Nifty March Fut 1 lot and Sell Nifty Apr Fut 1 lot or vice versa

Arbitrage 100 in case of bank nifty will be

Sell Bank nifty March 1 lot and Buy Bank nifty Apr 1 lot or vice versa

Any position like this is a hedged position and margin required is small

Now let us understand what is Arbitrage 90?

Buying one index and selling other index of the same month is what we call arbitrage 90

These are two naked unhedged positions in both different indices and will require more margin

I think it is clear now, what we mean by Arbitrage 100 & Arbitrage 90

We will elaborate more on the thought process that goes behind the idea of arbitrage 90. It is
consistently profitable way to make handsome profit with great ROI with very little (almost negligible)
risk.

In the Indian market both nifty and bank nifty are two separate indices which are traded on NSE.

Though they have different composition, about 35% stocks of Bank nifty are also a part of Nifty. So their
movements are related to each other in nonlinear fashion. Sometimes speed/pace of nifty is higher
whereas at other times that of Bank nifty is higher. (One stops where other moves fast, then reverse)
This creates gap/vacuum in their prices at 90 degree up and down many times in a month. It is observed
that market momentum creates gap between these two in the range of 12 - 27 K (average 20 K) per set
of position. 12 K gap happens 7-8 times, 20 K two times in a month while 27 K gap happens once in two
three months.

Whenever this vacuum appears in price, usually market reverses the direction from that point. This
point we call a zero line it is a point where reversal from one to other direction occurs with certain
amount of predictability. This predictable nature of the movement of the market creating gap/vacuum
in the prices of nifty and bank nifty is what we exploit to make decent profit
Now it is interesting to note that... If we take arbitrage 100 positions in both indices but in opposite way
to each other, they will also become 2 positions of Arbitrage 90

Like below

1. Buy March Nifty Fut 1 lot and Sell BNF March Fut 1 lot
2. Sell Apr Nifty Fut 1 lot and Buy BNF Apr Fut 1 lot

These positions taken all together will be hedged one position and will require less margin.

These positions in the market will soon come to a point where either of the two contracts of same
month will be in profit of around 20 K. This is what we call line zero from where mostly indices may
reverse their course. At this point, we book profit and close one position while we continue to hold the
position with 20 K Loss.

Here one important thing to remember is closing position in profit will make remaining position
naked /unhedged there by increasing margin requirement to large extent. So before closing profitable
position, we buy options on either side to create a hedge. Cost will be about 12-15 K at the beginning of
the month and about 7-8 K after 15th day of the month. These bought options serve two purposes 1.
Reduce margins payable 2. Avoid damage to position in case of wild swings of market, instead it creates
very profitable opportunity where bought options together make net profit by two to three times of
their cost

After booking the profit in one leg of same month at line zero, we will remain in other leg with hedge in
loss about 20 K. Now here on with further progression of indices, following things can happen

1. It may happen sometimes that due to wild swing in the market, our bought options will be giving 2-3
times net profit, this is additional bonus. Then book it after creating another hedge with further OTM
options.

2. Or our one position in loss reverses and shows 20 K profit. At this point we close the trade and start a
new one again.

3. It may happen that our position in loss of 20 K continues to make further loss increasing up to 27 K. In
this situation we may add one set of arbitrage at 20, 25-30 K loss. This requires additional margin but
also increases the amount of profit because sooner or later the indices will reverse and come to zero
line when we will have decent profit. When this happens we close the trade and start with the new cycle
again. Actual cycle flow of the trade taken will be updated later.

Good Night