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