The risk of arbitrage trading is small and the income is stable. For large funds, if it involves unilateral heavy positions, it will face the shortcomings of high position cost and high risk. On the contrary, if a unilateral light warehouse is involved, although the risk may be reduced, its opportunity cost and time cost are also higher. Therefore, on the whole, it is difficult to obtain relatively stable and ideal returns if large funds are unilaterally heavy or unilaterally light. However, if large funds intervene in the futures market with long and short positions, that is, carry out arbitrage trading, which can not only avoid the risks faced by unilateral positions, but also obtain relatively stable returns.

Advantages of arbitrage trading

1, with low volatility. Arbitrage trades profit from the spread of different contracts, and a significant advantage of the spread is that it usually has low volatility, so arbitrageurs face less risk. Generally speaking, the fluctuation of the spread is much smaller than that of the futures price. For example, the daily price of copper traded in Shanghai Futures Exchange is generally 400-700 yuan/ton, but the price difference between adjacent delivery months is about 80- 100 yuan/ton. Many commodity prices fluctuate greatly and need to be monitored every day. The intraday fluctuation of the price difference is often very small, and it only needs to be monitored several times a day or even less. If the funds in the account fluctuate greatly, speculators must deposit more funds to prevent possible losses. Using arbitrage trading, there are few such concerns.

2. The risk is limited. Arbitrage is the only futures trading method with limited risk. Because of the existence of arbitrage and the competitive choice between arbitrageurs, the price deviation between futures contracts will be corrected. Considering the transaction cost of arbitrage, the spread between futures contracts will remain within a reasonable range, so it is rare for the spread to exceed this range. This means that you can set arbitrage positions in historical high or low areas according to the historical statistics of spreads, and at the same time you can estimate the risk level you have to bear.

3. The risk is lower. Because of its hedging nature, arbitrage trading is usually less risky than unilateral trading. This is an important factor that we need to consider when comparing arbitrage and unilateral trading. Why is the risk lower? Portfolio theory shows that a portfolio consisting of two completely negatively related assets can minimize portfolio risk. Arbitrage is to buy and sell two highly correlated futures contracts at the same time, that is, to build a portfolio consisting of two almost completely negatively correlated assets, and the risk of this portfolio is naturally greatly reduced.

4. Protection against ups and downs. The hedging characteristics of many arbitrage transactions can protect the supply from ups and downs. Because of political events, weather, and government reports, futures prices can go up and down, and sometimes even cause them to go up and down. Prices are blocked on the price limit and cannot be traded. An upside-down unilateral trader will suffer heavy losses before closing his position. This usually leads to a deficit in the trader's account and requires additional margin. In the same environment, arbitrage traders are basically protected. Take intertemporal arbitrage as an example. Because an arbitrage trader is both long and short on the same commodity, his account usually does not suffer a big loss on the trading day. Although the spread may not follow the direction predicted by traders after the ups and downs stop, the losses caused by it are often much smaller than those caused by unilateral trading.

5. More attractive risk/reward ratio. Compared with a given unilateral position, an arbitrage position can provide a more attractive risk/return ratio. Although the profit of each arbitrage transaction is not very high, the success rate is very high, which is the advantage of limited risk, lower risk and lower volatility of spread. In the long run, only a few people profit from unilateral trading, and often no more than three people profit from 10. Arbitrage, on the other hand, has the characteristics of stable income and low risk, so it has a more attractive income/risk ratio and is more suitable for the operation of large funds. In the process of fierce competition between long and short sides holding unilateral positions, arbitrageurs can often take the opportunity to intervene and make profits easily.

6. The price difference is easier to predict than the price. Because futures prices fluctuate greatly, it is difficult to predict. In a bull market, futures prices will rise unexpectedly, while in a bear market, futures prices will fall unexpectedly. Arbitrage trading does not directly predict the price changes of future futures contracts, but predicts the price difference caused by future supply and demand changes. The latter prediction is obviously much less difficult than the former one. It is very complicated to determine the relationship between supply and demand that will affect commodity prices in the future. Although there are laws to follow, it still contains many uncertainties. It is unnecessary to consider all the factors that affect the relationship between supply and demand when forecasting the price difference. Because of the correlation between the two futures contracts, many uncertain supply and demand relations will only cause the prices of the two contracts to rise and fall together, and have little effect on the spread, so this supply and demand relationship can be ignored. To predict the price difference between two contracts, we only need to pay attention to the difference of each contract's response to the same change in supply and demand, which determines the direction and extent of the price difference.

Disadvantages of arbitrage trading

Everything has two sides, and arbitrage is no exception. In addition to the above advantages, there are several disadvantages:

1, the potential income is limited. In the eyes of many investors, the biggest disadvantage of arbitrage is the limited potential income. This is normal. When you limit the risk in a transaction, you usually limit your potential income. However, whether to choose arbitrage trading in the end depends on many advantages and limited potential benefits of arbitrage.

2. Excellent arbitrage opportunities rarely appear frequently. The number of arbitrage opportunities is closely related to the efficiency of the market. The lower the market efficiency, the more arbitrage opportunities; The higher the market efficiency, the less arbitrage opportunities. As far as the domestic futures market is concerned, the efficiency is not high, and each futures product has several good arbitrage opportunities every year. However, compared with the unilateral megatrend, there are many arbitrage opportunities every year.

3. Arbitrage also has risks. Although arbitrage has the advantages of limited risk and low risk, it is still risky. This risk comes from: price deviation continues to be wrong. The strong-weak relationship between contracts tends to maintain the trend of "the strong will be strong and the weak will be weak" in the short term. If this price deviation is finally corrected, the arbitrageur will have to suffer temporary losses in this transaction. If investors can bear such losses, they will eventually turn losses into profits, but sometimes investors will not survive the loss period. Moreover, if the short contract is run until the contract is delivered and the price deviation is not corrected, the arbitrage transaction will end in failure.