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Market Structure
What Is a Conversion (Arbitrage)?
A conversion is the arbitrage that enforces put-call parity — the trade that appears when option prices drift out of line, and vanishes when they snap back.
NoVo Options Trading · 2026
A conversion is an arbitrage combining long stock, a long put, and a short call at the same strike to lock in a risk-free profit when options are mispriced relative to put-call parity. It’s a professional/market-maker trade.
How it works
You buy the stock, buy a put, and sell a call — all at the same strike/expiration. This combination has a fixed, known payoff (the long put + short call = synthetic short stock, offsetting the long stock). If the options are priced such that this locked-in position yields more than the risk-free rate, you’ve captured a risk-free profit — a conversion arbitrage.
Why it matters
Conversions (and their opposite, reversals) are how arbitrageurs enforce put-call parity — when prices drift out of line, they execute these trades until the mispricing disappears. This is why you rarely see free money in options: the arbs close it fast. It’s the mechanism keeping call/put/stock prices consistent.
A conversion is the trade that harvests a broken parity — and by harvesting it, fixes it. It’s why option mispricings don’t last.
The takeaway
A conversion is a defined-payoff arbitrage that enforces put-call parity, capturing risk-free profit from mispricing. It’s a market-maker tool, not a retail scalping strategy — but it explains why option prices stay consistent (arbs like this police them). Its mirror is the reversal.
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NoVo is a software tool for market analysis and for executing trades you initiate, not financial advice. This article is general education, not investment advice. Options trading involves substantial risk of loss, up to and including your entire capital. NoVo makes no guarantee of profit, win rate, or performance, and past results do not predict future outcomes. You are responsible for your own broker account, configuration, and trading decisions.