What It Means
Arbitrage means buying an asset in one market and simultaneously selling it in another to pocket a temporary price difference between the two, with little to no directional risk. It's not a bet on where price goes — it's a bet that a gap between two prices for the same thing closes.
How It Works
The classic version is cash-futures arbitrage: buy a stock in the cash (equity) market while simultaneously selling its futures contract if the futures price is trading at a premium wider than justified. As expiry nears, the two prices converge, and you pocket the difference regardless of which way the stock actually moves. The catch is speed — the moment a gap appears, high-frequency traders and institutional desks tend to close it within seconds, so retail traders rarely get a clean shot at pure arbitrage.
Example
Say Infosys trades at ₹1,850 in the cash market, but its near-month futures contract is quoted at ₹1,862 — an unusually wide premium. A trader buys 400 shares (one lot) in cash and sells one lot of futures at the same time. As expiry approaches and the futures price converges toward the cash price, the trader unwinds both legs and locks in roughly the ₹12-per-share gap, minus brokerage and STT.