Conversion & Reversal Arbitrage takes advantage of pricing differentials between the PUTs and CALLs. For example, a covered CALL position is synthetically the same position as a short PUT. If the short PUT is trading at a higher premium than the covered CALL, and the trader can obtain a more substantial credit by selling PUT, then the trader can exploit the pricing arbitrage.
|Synthetic Position||Components||Closing Instrument||Classification|
|Synthetic Long Stock||Long Call + Short Put||Short Stock||Reversal|
|Synthetic Short Stock||Short Call + Long Put||Long Stock||Conversion|
|Synthetic Long Call||Long Stock + Long Put||Short Call||Conversion|
|Synthetic Short Call||Short Stock + Short Put||Long Call||Reversal|
|Synthetic Long Put||Short Stock + Long Call||Short Put||Reversal|
|Synthetic Short Put||Short Call + Long Stock||Short Put||Conversion|