Arbitrage

Definition

Arbitrage is the simultaneous purchase and sell of an asset to profit from the imbalance in price.  Using this strategy, takes advantage of price inefficiencies in the market.

Why It's Important

Arbitrage opportunities provide a way to collect high returns with little to no cost to you.  This is how it works:

Let's say a stock is trading on the NYSE (New York Stock Exchange) for $50 a share.  Simultaneously, the same exact stock is trading on the SSE (Shanghai Stock Exchange) at $50.30 per share.  An arbitrage opportunity exists because you can buy on NYSE and turn around and sell on SSE making a profit of $0.30 a share.   

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You buy a big name stock (like Apple, Alphabet, or Amazon).  In order to create an arbitrage opportunity, you short the S&P 500 Index (SPY).  This way if the stock gains, you win but also if the stock goes down you win.  Big name stocks weigh very heavily on the market and if the stock goes down the index would probably follow suit.