Strike Arbitrage

Strike Arbitrage is an options arbitrage strategy which takes advantage of discrepancies in extrinsic value across 2 different strike prices on the same stock in order to make a risk-free profit. Strike arbitrage takes advantage of dramatic breaches in Put Call Parity resulting in large surges in the extrinsic value of stock options of certain strike prices. This situation occurs mainly in out of the money options when sudden demand surges causes implied volatility to move temporarily out of proportion. To put simply, when the price of out of the money options are higher than in the money options, a possible Strike Arbitrage opportunity may arise. Such opportunities are extremely rare, gets filled out and corrected quickly and may not result in enough profits to justify the commissions paid. That is why strike arbitrage remains the domain of professional options traders such as floor traders and market makers who need not pay broker commissions.