A trading tactic in which an asset is bought at a low price on one market and then is immediately sold on a different market for a higher price. Price differences of identical assets arise, sometimes, for very short periods of time. Arbitrageurs immediately spot such inefficiencies and intervene. Eventually, the law of one price comes to hold again, and riskless profit opportunities disappear. For example, if an investor could buy an asset for 50 dollars and sell it simultaneously for 60 dollars, a riskless (arbitrage) profit of 10 dollars would be made.

In finance theory, arbitrage is a “free lunch”, because an arbitrage transaction makes, or is supposed to make, a profit without risk, and the risk/return tradeoff ceases to hold. But a riskless transaction doesn’t necessarily mean an effortless or costless transaction. For example, traders incur transaction costs on purchases and sales of stocks. Moreover, most of the time, traders have to pay some efforts as to craft their homemade arbitrage strategy based on lending or borrowing as the case may require.

In the context of options, arbitrage refers to a trading strategy which is established by buying and selling similar options simultaneously.