How your concept of Arbitrage can limit your profit generating capacity or increase it.

The focus of this post is arbitrage, which is I believe a French language derived term, which I personally define as profiting from the difference. I define it in this open and unlimited way to make you understand how large the potential for arbitrage is in this world. Arbitrage is frequently defined by the examples used to explain it. Which leaves a mental construct or framework in peoples minds which can be limiting.

For example, if I explain arbitrage to you in terms of buying and selling options, I will tell you that you sell option X for 1.00 per contract and buy it back for 0.25 dollars your profit is the difference or 0.75 dollars. Now you have a mental framework or construct for arbitrage which involves buying or selling a financial instrument. It is correct, but limiting. I believe arbitrage is best understood when it’s not limited by concrete pieces of a construct like options, stocks, apples or oranges. I think arbitrage is best explained by abstract symbols because the abstract symbols better delineate the unlimited potential of arbitrage.

For example, your obtain temporary control over X or Y or Z. I use X, Y or Z specifically so the object of control is undefined. I use obtain control, not buy, rent or any other defined concrete term to keep it abstract and undefined. Then you determine your cost for control of X, Y or Z, called A, and then you determine how you can allow someone else to obtain temporary control over X, Y or Z by paying a cost called B, which is greater then A, and you profit from the difference.

Now while, what I am describing sounds like the basics of a simple buy and sell arrangement, it’s important to understand that it’s so much more. You see if I explain arbitrage by buying apples for 5 cents and selling apples for 7 cents, and pocketing the 2 cent difference as profit, I create a mental framework in your mind which makes you think you must buy or possess apples, and then you must sell apples. But that’s wrong.

First of all you don’t need to be limited to apples to profit from a buy and sell arrangement. Because you could buy and sell oranges, or grapes, or wood, or coal or dirt. The possibilities are limited only by your creativity.

Second you don’t need to buy apples to be able to sell apples. It’s important that we just need the buyer to feel we can deliver the apples. That can be because they see the apples, or we have a picture of the apples, or we have an agreement conveying us the apples. We need to demonstrate the we have control over the apples in some way, so that we can convey or give that control to our buyer. You could rent apples, you could lease apples, you could steal apples, you could sell apples first and buy them second. You could sell apples you don’t own and not deliver them at all and leave town. I don’t recommend that, but the point is the possibilities are limited only by your imagination.

Once we start thinking of arbitrage in these terms we can look at complex or convoluted processes and understand them because we can recognize the four morning parts, control over object A, at cost X, and conveyance of control over object A to another person or entity, for cost Y and the difference between X and Y is our profit. We stop focusing on apples, buying and or selling. Our focus is on the cost of controlling items of value, conveying control for items of value and profiting from conveying control. We need to know how do we obtain temporary control over object A, what are the costs X, how do we allow someone else to obtain control over object A and what do we need to set cost Y at, so we generate a profit, but make the cost Y acceptable enough that they want to do the deal. Those are the basics, and everything else are the details which protect the buyer and seller in this transaction. Everything else is the details of how we appraise the object, how do we verify our control over it, how do we convey control over it, how do we receive payment and what we do to regain control if terms of providing temporary control are not met. Those details are as important as the first concept, but require different skill sets or focus. You can obtain both skill sets or you can obtain temporary use of those skills. The arbitrage idea is the idea for creating a difference and generating a profit. The details of the deal execute the idea.

Remember knowledge is power, power brings wealth and wealth brings freedom.
Free yourself.

✍🏼 by Shortsegments.

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