Cash Arbitrage
'Arbitrage' in simplest term is buying and selling same share simultaneously in two different stock exchange in order to eat profit from the price difference between the two shares. It is arbitrage which keep price of stocks almost identical in both stock exchanges. For example; Suppose Share of 'Ashok Leyland' is trading at ₹88 on the NSE and at ₹88.75 on the BSE, you could buy a certain number of this scrip at ₹88 from the NSE and sell the same quantity at ₹88.75 on the BSE, so that you could earn 75 paise per share without any trade risk. However you have pay brokerage as per your broker's plan.
In most equity markets, the trader can immediately claim a profit of ₹2; however, In India cross-clearing is not permitted so you need to sell the NSE shares and buy it back from NSE within the same day in order to profit of 75 paise per share. In case you bought and sold 1,000 shares of 'Ashok Leyland' at above rates you could have earned 1,000 x 0.75 = ₹750 within couple of minutes.
Cash-Futures Arbitrage
Another common type of playing 'Arbitrage strategy' is the Cash-Futures arbitrage where one can buy a stock in cash and sell future contract of the same stock with the same number of shares. It is noteworthy here that Futures contracts are traded in lots (i.e. 7,000 share in case of 'Ashok Leyland'), so the you need to execute the same number of shares.
For example; Suppose 'Ashok Leyland' equity is trading at ₹88 on the NSE, at the same time the near month Futures contract is trading at ₹90 on the same stock exchange; you can buy the underlying (i.e. shares of 'Ashok Leyland') and sell the Futures contract. Of course you should execute the same number of shares as we have already learnt that Futures contracts are traded in lots. Since 'Ashok Leyland' has a lot size of 7,000, you could purchase 7,000 shares of 'Ashok Leyland' at ₹88 and sell one lot of 'Ashok Leyland' Futures at ₹90.
Now, you have two options here; since difference in price between the Futures contract and the Cash-equities price is ₹2, you should to wait for the difference in price to be lower than ₹2 in order to get profit, even if this could not be possible, you can hold your positions overnight and may execute the reverse trades on a any date till expiry of that trading month.
One risk associated with holding your positions overnight is that brokerage for delivery of shares is comparatively higher than that of executing within the same day termed as intraday, hence, you are suggested to execute your position within the same day as soon as price difference comes below ₹2.
Cash-Futures Spread (CFS)
BSE introduced a Cash-Futures Spread (CFS) in Derivatives segment.
Salient Features of Cash-Futures Spread (CFS) Facility
"The CFS facility consists of 2 legs i.e. one equity segment leg and second leg; futures instrument leg. In order to facilitate it, CFS facility is available for trading across 3 contract months at any time, corresponding to the current, near and far monthly futures instruments on that underlying asset."
Finding opportunities in stocks where the price discrepancy is high
There are a number of ways to earn money through arbitrage opportunity. Such as buying a share in one exchange (say it NSE) and selling the same in other exchange (say BSE) or vice-versa. As cross selling across exchanges in India is not permitted, one can earn from such cross market arbitrage opportunities if he has actual delivery position in the stock he wishes to make arbitrage benefit; from an earlier period of time . In simple words it is possible only when one has the underlying stock in his holding before the day playing arbitrage.
How to find the best 'Arbitrage opportunity'?
Many a arbitrage traders use automated algorithms which regularly monitor the price discrepancies in different exchanges of stock market. If you too are looking to earn from'Arbitrage opportunity', you need to sit back patiently and look for the opportunities where the price discrepancy is much higher, you may also use some sites to find out the most profitable 'Arbitrage opportunity'; here we provide you a link from moneycontrol moneycontrol.com/stocks/marketstats/arbitrage/futures-spot-near.html
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