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 |