Beating the financial markets consistently – the secrets of commodities futures and option arbitrageur
Sam Adelton
Jun. 22, 2007

The market gurus that beat the financial systems all the time know one secret. The secret is – time is the essence of winning in the markets. No matter which model you use, sooner or later the model will put you in trouble. The fact is quantum mechanics clearly demonstrate that it is impossible to predict the future consistently for a long period of time.

Then how do these financial wizards make consistent super profits in the market place? They bring time to their side. The theory is simple. 95% of the time markets do nothing. You need to make money during those 95% of time. Write covered options with protective option cover are called futures and option arbitrage. The profit is made at the very beginning of the trade and the risk money is kept ready as margin and more to cover the loss just in case.

For example, crude oil is very volatile right now. It is a perfect den for the arbitrageur. September crude future is bought at $69 a barrel. A deep in the money call is sold (for example $66 September call) and a protective September put of $63 is bought for a little price. From the net transaction the arbitrageur pockets close to $4000. $3000 is kept for the covered call. $1000 is projected profit in two months on a margin of $500 approximately. If crude oil falls below $64 a barrel, there is a max loss of $1000. Now analyze what can happen. Either crude oil will go up, or go down, or just stay more or less flat. The arbitrageur is betting on the fact that crude oil will go up or stay the same till middle of August 2007 when the September options expire.

The fact that the arbitrageur makes money if crude oil stays the same makes a big difference. Remember, 95% of the time market stays flat. If you can narrow the risk down like this, on the long run you are the winner.

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