Conversion

A conversion is a sophisticated three-leg arbitrage strategy that exploits pricing inefficiencies between puts, calls, and the underlying asset to lock in risk-free profits, making it a cornerstone strategy for professional market makers and arbitrageurs. This advanced strategy involves simultaneously holding long stock, long put, and short call positions at the same strike price, creating a synthetic short position that should theoretically yield the risk-free interest rate. The strategy is particularly effective when options are mispriced relative to their theoretical values based on put-call parity relationships, creating opportunities for risk-free profit extraction. Professional traders and market makers use conversions to capture arbitrage opportunities while providing market liquidity and maintaining delta-neutral positions. The strategy requires sophisticated execution capabilities and deep understanding of options pricing models to identify and capture pricing discrepancies before they disappear. Conversions are typically executed in high-volume, liquid markets where pricing inefficiencies can be quickly identified and exploited. Risk management involves ensuring proper execution timing and managing early assignment risks on the short call position

If NIFTY is at ₹25,800, set up: Long NIFTY at ₹25,800, Buy ₹25,800 Put for ₹110, Sell ₹25,800 Call for ₹120, creating ₹10 net credit with risk-free profit potential if properly executed at fair value prices.