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Conversion 2.
An arbitrage transaction in which a trader seeks to take advantage of an imbalance between call option prices and put option prices by taking a long position in the underlying and simultaneously creating a synthetic short position in the same underlying.
This strategy is implemented in the case of an underpriced put option or an overpriced call option. The trader acquires a long position in the underlying either by purchasing the underlying itself or a futures contract on the underlying. The trader simultaneously creates a synthetic short position in the underlying by purchasing a put option and writing a call option with the same maturity and exercise price. The exercise price corresponds to the exercise price of the underpriced put option or overpriced call option. All in all, the risk assumed by the trader is theoretically nil.
Translations
Synonyms and variations
- Conversion arbitrage