---
title: "Arbitrage & Relative Value Strategies"
description: "Strategies that seek to profit from price differences or mispricings between related instruments, including merger arbitrage, statistical arbitrage, and pairs"
canonical: https://www.getswoopr.com/strategies/arbitrage-and-relative-value/
source: "Swoopr Investment: https://www.getswoopr.com"
---

## Direct Answer

Strategies that seek to profit from price differences or mispricings between related instruments, including merger arbitrage, statistical arbitrage, and pairs trading.

# Arbitrage & Relative Value Strategies

> Arbitrage and relative value strategies profit from price differences between instruments that should be linked, such as a stock and its futures, a convertible bond and the stock it converts into, an ETF and its basket, or two listings of the same company, buying the cheaper and selling the dearer until the gap closes. The purest trades lock in a near-riskless profit at entry; the rest bet on convergence that usually but not always arrives.

## What do Arbitrage & Relative Value strategies have in common?

Every strategy here starts from a pricing relationship with an economic anchor. Cash-and-carry and reverse cash-and-carry tie a futures price to spot through financing and storage; index and ETF arbitrage tie a fund or futures contract to the basket it represents; conversion and reversal arbitrage tie puts and calls to the stock through put-call parity; cross-listed, dual-listed and ADR arbitrage tie the same share across markets. When the market price departs from the relationship by more than it costs to trade both sides, the arbitrageur takes both sides and waits for convergence.

The family divides by how firm that anchor is. The textbook arbitrages (box spreads, cash-and-carry, conversions) converge by contract at expiry and carry little risk beyond execution and financing. The relative value trades (pairs, convertible, fixed-income and basis trades, calendar and commodity spreads such as crack, crush and spark spreads) rest on a relationship that history or economics suggests but nothing enforces, so the spread can widen before it narrows and the trader needs capital to wait.

Because the profit per trade is small, the strategies are run with leverage and at scale, which is why they belong mostly to market makers, proprietary desks and hedge funds. Several of the largest financial accidents, from Long-Term Capital Management in 1998 to the Treasury basis unwind of March 2020, were relative value positions whose spreads widened faster than their financing allowed.

## How do you choose a Arbitrage & Relative Value strategy?

- Classify the anchor first: a trade that converges by contract (expiry, redemption, exercise) is a different risk from one that converges only if history repeats
- Measure the edge after every cost, including borrow fees, financing, commissions on each leg and the bid-ask spread; most apparent arbitrages are smaller than the cost of capturing them
- Size by the spread's historical widening, not by its expected narrowing, since the position must survive the widening to collect the narrowing
- Prefer the trades where the instruments can actually be delivered against each other, which removes the risk that two prices never meet
- Treat any relative value trade with leverage above a few times capital as a financing bet as much as a pricing bet

## Arbitrage & Relative Value strategies at a glance

| Strategy | In one sentence | Risk level | Investor level | Time horizon |
| --- | --- | --- | --- | --- |
| [ADR Arbitrage](https://www.getswoopr.com/strategies/adr-arbitrage/) | ADR arbitrage trades the price difference between a company's American depositary receipts in the United States and its ordinary shares on the home exchange, buying the cheaper and selling the dearer after converting for the ADR ratio and the exchange rate, and closing the trade when the two prices realign or by converting one into the other. | High | Professional | Months to Years |
| [Basis Trading](https://www.getswoopr.com/strategies/basis-trading/) | Basis trading takes a position in the difference between a futures price and the spot price of the underlying, the basis, buying spot and selling futures when the basis is rich and expected to narrow, or the reverse when it is cheap, so the profit comes from convergence rather than from the direction of the asset. | High | Professional | Months to Years |
| [Calendar Spread Arbitrage](https://www.getswoopr.com/strategies/calendar-spread-arbitrage/) | Calendar spread arbitrage trades the price relationship between two futures contracts on the same asset with different expiries, buying one month and selling another when their spread departs from what carry costs justify, profiting as the spread returns to its fair value. | High | Professional | Days to Months |
| [Cash-and-Carry Arbitrage](https://www.getswoopr.com/strategies/cash-and-carry-arbitrage/) | Cash-and-carry arbitrage buys an asset in the spot market with borrowed money, sells a futures contract on it, and holds the asset to delivery, locking in a profit when the futures price exceeds the spot price plus the cost of carrying the asset to expiry. | High | Professional | Months to Years |
| [Closed-End Fund Arbitrage](https://www.getswoopr.com/strategies/closed-end-fund-arbitrage/) | Closed-end fund arbitrage buys a closed-end fund trading at a deep discount to its net asset value and hedges the underlying exposure by shorting a matching index or ETF, so the position profits as the discount narrows, whether through the fund's own buybacks, a tender, a conversion to open-end, or activist pressure. | High | Professional | Months to Years |
| [Convertible Arbitrage](https://www.getswoopr.com/strategies/convertible-arbitrage/) | Convertible arbitrage buys a convertible bond and shorts the issuer's stock in the ratio given by the bond's delta, so the position is hedged against moves in the stock and earns the bond's coupon, the short rebate and the gains from rebalancing the hedge as the stock moves, which is a way to buy the embedded option cheaply. | High | Professional | Months to Years |
| [Crack Spread Trading](https://www.getswoopr.com/strategies/crack-spread-trading/) | Crack spread trading trades the refining margin, the difference between the price of refined products (gasoline and heating oil or diesel) and the price of crude oil, by buying product futures and selling crude futures in a ratio such as 3:2:1 (three crude, two gasoline, one heating oil) or the reverse, so the position profits from changes in refiners' margins rather than in oil prices. | High | Professional | Days to Months |
| [Cross-Listed Arbitrage](https://www.getswoopr.com/strategies/cross-listed-arbitrage/) | Cross-listed arbitrage trades the same company's shares on two exchanges, such as a Canadian company listed in Toronto and New York, buying on the exchange where the shares are cheaper after currency conversion and selling where they are dearer, since the shares are fungible and the gap must close. | High | Professional | Months to Years |
| [Crush Spread Trading](https://www.getswoopr.com/strategies/crush-spread-trading/) | Crush spread trading trades the soybean processing margin, the value of the soybean meal and soybean oil produced from a bushel of soybeans minus the cost of the beans, by buying the products and selling the beans (or the reverse), so the position profits from changes in crushers' margins rather than in soybean prices. | High | Professional | Days to Months |
| [Crypto Basis Trading](https://www.getswoopr.com/strategies/crypto-basis-trading/) | Crypto basis trading buys a cryptocurrency in the spot market and sells a futures contract on it at a higher price, locking in the difference, called the basis, as the futures price converges to spot at expiry, with no exposure to the direction of the coin. | High | Professional | Months to Years |
| [Dual-Listed Arbitrage](https://www.getswoopr.com/strategies/dual-listed-arbitrage/) | Dual-listed company arbitrage trades the two legally separate but economically linked shares of a dual-listed company structure, such as the former Royal Dutch and Shell Transport or BHP's two listings, buying the share that trades below the ratio set by the companies' equalization agreement and selling the other, expecting the ratio to revert. | High | Professional | Months to Years |
| [ETF Arbitrage](https://www.getswoopr.com/strategies/etf-arbitrage/) | ETF arbitrage exploits differences between an exchange-traded fund's market price and the value of its underlying holdings, with authorized participants creating ETF shares when the fund trades above net asset value and redeeming them when it trades below, and other traders buying or selling the ETF against a basket of its holdings when the gap exceeds costs. | High | Professional | Months to Years |
| [Fixed-Income Arbitrage](https://www.getswoopr.com/strategies/fixed-income-arbitrage/) | Fixed-income arbitrage takes long and short positions in related bonds and interest-rate derivatives to profit from small pricing discrepancies, such as between on-the-run and off-the-run Treasuries, between a bond and its swap, or along the yield curve, with leverage used to make the small spreads worth capturing. | High | Professional | Months to Years |
| [Index Arbitrage](https://www.getswoopr.com/strategies/index-arbitrage/) | Index arbitrage exploits price differences between an index futures contract and the basket of stocks that make up the index, buying the stocks and selling the futures when the futures trade above fair value, or the reverse when below, with the position held until the futures expire and converge to the index level, capturing the mispricing with no exposure to the market's direction. | High | Professional | Years to Decades |
| [Intercommodity Spread Trading](https://www.getswoopr.com/strategies/intercommodity-spread-trading/) | Intercommodity spread trading takes a long position in one commodity futures contract and a short position in a related but different commodity, such as long soybean oil against short soybean meal, long heating oil against short gasoline, or long gold against short silver, to profit from a change in the price relationship between the two rather than from the direction of either. | High | Professional | Days to Months |
| [Pairs Relative-Value Trading](https://www.getswoopr.com/strategies/pairs-relative-value-trading/) | Pairs trading buys one security and shorts a closely related one when the spread between them stretches beyond its usual range, betting the spread will narrow regardless of which way the market moves. | High | Professional | Months to Years |
| [Reverse Cash-and-Carry Arbitrage](https://www.getswoopr.com/strategies/reverse-cash-and-carry-arbitrage/) | Reverse cash-and-carry arbitrage sells an asset short, invests the proceeds at the risk-free rate, and buys a futures contract on the same asset, locking in a profit when the futures price is below the asset's spot price plus the cost of carry, which is the mirror of the cash-and-carry trade used when futures are overpriced. | High | Professional | Months to Years |
| [Spark Spread Trading](https://www.getswoopr.com/strategies/spark-spread-trading/) | Spark spread trading takes positions on the difference between the price of electricity and the cost of the natural gas needed to generate it, adjusted for the plant's heat rate, which is the gross margin of a gas-fired power plant, by going long power futures and short gas futures when the spread is expected to widen, or the reverse when it is expected to narrow. | High | Professional | Days to Months |
| [Treasury Basis Trade](https://www.getswoopr.com/strategies/treasury-basis-trade/) | The Treasury basis trade buys a Treasury bond and sells a Treasury futures contract against it, or the reverse, to capture the difference between the cash bond's price and the futures price adjusted by the conversion factor, financing the bond in the repo market and holding until the futures delivery, where the two prices converge. | High | Professional | Months to Years |

Risk level, investor level and time horizon are each strategy's own snapshot; the one-sentence summary is the opening of its profile.

## Strategies in This Category

- [ADR Arbitrage](https://www.getswoopr.com/strategies/adr-arbitrage/)
- [Basis Trading](https://www.getswoopr.com/strategies/basis-trading/)
- [Calendar Spread Arbitrage](https://www.getswoopr.com/strategies/calendar-spread-arbitrage/)
- [Cash-and-Carry Arbitrage](https://www.getswoopr.com/strategies/cash-and-carry-arbitrage/)
- [Closed-End Fund Arbitrage](https://www.getswoopr.com/strategies/closed-end-fund-arbitrage/)
- [Convertible Arbitrage](https://www.getswoopr.com/strategies/convertible-arbitrage/)
- [Crack Spread Trading](https://www.getswoopr.com/strategies/crack-spread-trading/)
- [Cross-Listed Arbitrage](https://www.getswoopr.com/strategies/cross-listed-arbitrage/)
- [Crush Spread Trading](https://www.getswoopr.com/strategies/crush-spread-trading/)
- [Crypto Basis Trading](https://www.getswoopr.com/strategies/crypto-basis-trading/)
- [Dual-Listed Arbitrage](https://www.getswoopr.com/strategies/dual-listed-arbitrage/)
- [ETF Arbitrage](https://www.getswoopr.com/strategies/etf-arbitrage/)
- [Fixed-Income Arbitrage](https://www.getswoopr.com/strategies/fixed-income-arbitrage/)
- [Index Arbitrage](https://www.getswoopr.com/strategies/index-arbitrage/)
- [Intercommodity Spread Trading](https://www.getswoopr.com/strategies/intercommodity-spread-trading/)
- [Pairs Relative-Value Trading](https://www.getswoopr.com/strategies/pairs-relative-value-trading/)
- [Reverse Cash-and-Carry Arbitrage](https://www.getswoopr.com/strategies/reverse-cash-and-carry-arbitrage/)
- [Spark Spread Trading](https://www.getswoopr.com/strategies/spark-spread-trading/)
- [Treasury Basis Trade](https://www.getswoopr.com/strategies/treasury-basis-trade/)

## What risks do Arbitrage & Relative Value strategies share?

The shared risk is that convergence arrives later than the financing lasts. A spread that should close can widen for months when a forced seller or a liquidity shock pushes the cheap instrument cheaper, and a leveraged position is liquidated at the widest point, which is exactly what happened to convertible arbitrage in 2008 and to the Treasury basis trade in 2020. Execution risk is second: a trade that needs two legs can end up with one filled and the other not, leaving a directional position. Borrow risk affects every trade with a short leg, since a recall or a rising borrow fee can end the arbitrage before it pays. The contract-enforced trades carry early-assignment and delivery risks that turn a riskless position into an open one.

## Frequently Asked Questions

What is the difference between arbitrage and relative value?

Arbitrage in the strict sense locks in a profit at entry because the two prices must meet by contract, such as a futures price converging to spot at expiry or a box spread paying its strike difference. Relative value trades the same kind of price gap between related instruments with nothing that forces convergence, so they carry the risk that the gap widens or stays open.

Is arbitrage risk-free?

Only in the textbook case where every leg is executed at once, financing is locked for the whole period and nothing can be assigned or recalled early. In practice each of those can fail, and the leveraged relative value trades that make up most of this family can lose heavily when a spread widens, which is why the largest arbitrage failures in history involved positions that were called riskless.

Can a retail investor do arbitrage?

The pure arbitrages are captured within seconds by firms with lower costs and faster execution, so retail traders rarely see one that survives commissions. The relative value trades such as pairs trading, closed-end fund discounts and some calendar spreads are accessible, but they are convergence bets with real risk rather than locked-in profits, and should be sized that way.

[Swoopr Editorial Team](https://www.getswoopr.com/authors/swoopr-editorial-team/) produces independent investment education and research content.

Corrections: [corrections policy](https://www.getswoopr.com/legal/corrections-policy/). Standards: [editorial standards](https://www.getswoopr.com/legal/editorial-policy/).