Prop trading is recommended for those traders who have a minimum amount but want to earn huge profits. But there are various Strategies in Proprietary Trading that many firms follow. Amongst all strategies, the traders choose those which suit them best, and as a result, they can make financial trades that are beneficial for them. Below are the top strategies followed by prop trading firms:
Top Strategies of trading:
For every strategy, there are rules and terms and conditions that are specified. We have explained each of the trading strategies below:
The index arbitrage strategy seeks to profit from the difference between the stock’s current price and its theoretical future price. It is one of the top recommended strategies as well. Buying the stock at 3000 today and selling it at 4110 at a later date is an example of index arbitrage. As a result, the strategy entails purchasing the lower-priced index and selling the higher-priced index, with the expectation that prices will return to equivalency.
The next strategy is merger arbitrage which is also known as risk arbitrage. The stocks of the merging firms are bought by the trading company in this strategy. The main point of this strategy is those market inefficiencies are looked at, and the firms take advantage of them. This can happen when two or more than two merging companies’ stocks are purchased and sold at the same time, resulting in less risky but profitable opportunities.
The third strategy followed by most prop firms is global macro trading. The global macro-trading strategy is actually based on how macroeconomic events are interpreted in trading terms on a national, regional, or global scale. To ensure the successful implementation of global
macro strategy, there are portfolio managers who examine macroeconomic and geopolitical factors. Interest rates, political events, currency exchange rates, international trades, and international relations are examples of such important factors that are to be considered. Furthermore, this strategy is based on the systematic risk of markets over which the organisation has no control.
Volatility arbitrage is the next strategy. The goal of this strategy is to profit from the difference between implied volatility in options and corresponding movements in the underlying trades or stocks. Volatility arbitrage is typically carried out in a delta-neutral portfolio that includes an option and also an underlying asset.
In this trading, if the trader gets to know that volatility is low, and also the underlying asset will be anticipated to have great volatility in the near future. Then trading firms allow traders to go for the long call option where they attain a short position in underlying. If there is an increase in volatility, the value of the options also increases. Similarly, if the price of any underlying asset remains unchanged, then the outcomes will be in favour of the trader.
Not only these but there are also many other best and essential strategies that prop traders take. The traders gradually explore them when they start to know the rules and tricks of prop trading.