What Are the Primary Risks Involved in Options Trading Arbitrage Strategies?

The primary risks in options arbitrage include execution risk, where price changes occur before all legs of the trade are complete, and liquidity risk, where there aren't enough buyers or sellers to execute the trade at desired prices. Volatility risk is another key factor, as unexpected market swings can erase the small profits from arbitrage.

Additionally, counterparty risk, the danger that the other party in the trade will default, is a significant concern, especially in over-the-counter (OTC) markets. Model risk, where the pricing model used to identify the arbitrage is flawed, can also lead to losses.