What is convergence trade?

Convergence trade is the practice of buying a security with a future delivery date for a low price and selling a similar security, also with a future delivery date, for a higher price. The aim is for the prices of the securities to converge, resulting in profit. Where have you heard about convergence trade?

What is convergent price?

Convergence is the movement of the price of a futures contract toward the spot price of the underlying cash commodity as the delivery date approaches. Convergence is the movement in the price of a futures contract toward the spot or cash price of the underlying commodity over time.

Why is convergent trading a risk-free profit?

If not, there is an opportunity for arbitrage and risk-free profit. Convergence happens because the market will not allow the same commodity to trade at two different prices at the same place at the same time. For example, you rarely see two gasoline stations on the same block with two very different prices for gas at the pump.

Is convergence a risky strategy?

Convergence is often seen as a strategy that is not as risky as other approaches to trading. However, in most cases, it usually means that a trader needs to hold the two positions for a long period. The opposite of convergence is divergence. Divergence happens when two similar assets are moving in different directions.