Reversal

A reversal is a sophisticated three-leg arbitrage strategy that represents the opposite of a conversion, exploiting pricing inefficiencies to lock in risk-free profits through synthetic long exposure combined with actual short positioning. This advanced strategy involves simultaneously holding short stock, short put, and long call positions at the same strike price, creating a synthetic long position that should theoretically yield the risk-free interest rate when properly executed. The strategy is particularly effective when put-call parity relationships are violated, creating opportunities for professional arbitrageurs to capture risk-free profits while providing essential market liquidity. Professional traders and institutional market makers use reversals as part of comprehensive arbitrage programs that help maintain efficient options pricing across all strike prices and expirations. The strategy requires sophisticated risk management systems and deep understanding of dividend timing, interest rate effects, and early assignment probabilities to ensure profitable execution. Reversals are typically executed in conjunction with conversions as part of broader market-making operations that capture small but consistent profits from pricing inefficiencies

If NIFTY is at ₹25,800, set up: Short NIFTY at ₹25,800, Sell ₹25,800 Put for ₹110, Buy ₹25,800 Call for ₹120, creating ₹10 net debit with risk-free profit potential when options are mispriced relative to theoretical values.