A conversion is an arbitrage strategy in options trading that can be performed for a riskless profit when options are overpriced relative to the underlying stock. To do a conversion, the trader buys the underlying stock and offset it with an equivalent synthetic short stock (long put + short call) position.

Conversion Construction
Long 100 Shares
Buy 1 ATM Put
Sell 1 ATM Call

Limited Risk-free Profit

Profit is locked in immediately when the conversion is done and it can be computed using the following formula:

Profit = Strike Price of Call/Put - Purchase Price of Underlying + Call Premium - Put Premium

Conversion Payoff Diagram
Graph showing the expected profit or loss for the conversion option strategy in relation to the market price of the underlying security on option expiration date.


Suppose XYZ stock is trading at $100 in June and the JUL 100 call is priced at $4 while the JUL 100 put is priced at $3. An arbitrage trader does a conversion by purchasing 100 shares of XYZ for $10000 while simultaneously buying a JUL 100 put for $300 and selling a JUL 100 call for $400. The total cost to enter the trade is $10000 + $300 - $400 = $9900.

Assuming XYZ stock rallies to $110 in July, the long JUL 100 put will expire worthless while the short JUL 100 call expires in the money and is assigned. The trader then sells his long stock for $10000 as required. Since his cost is only $9900, there is a $100 profit.

If instead XYZ stock had dropped to $90 in July, the short JUL 100 call will expire worthless while the long JUL 100 put expires in the money. The trader then exercises the long put to sell his long stock for $10000, again netting a profit of $100.

Note: While we have covered the use of this strategy with reference to stock options, the conversion is equally applicable using ETF options, index options as well as options on futures.


For ease of understanding, the calculations depicted in the above examples did not take into account commission charges as they are relatively small amounts (typically around $10 to $20) and varies across option brokerages.

However, for active traders, commissions can eat up a sizable portion of their profits in the long run. If you trade options actively, it is wise to look for a low commissions broker. Traders who trade large number of contracts in each trade should check out as they offer a low fee of only $0.15 per contract (+$4.95 per trade).

Reverse Conversion (Reversal)

If the options are relatively underpriced, the reversal is used instead to perform the arbitrage trade.

Ready to Start Trading?

Open an account at and get 100 commission-free trades + free virtual trading tool!

Your new trading account is immediately funded with $5,000 of virtual money which you can use to test out your trading strategies using OptionHouse's virtual trading platform without risking hard-earned money.

Once you start trading for real, your first 100 trades will be commission-free! (Make sure you click thru the link below and quote the promo code '60FREE' during sign-up)

Click here to open a trading account at now!

Follow Us on Facebook to Get Daily Strategies & Tips!

Options Arbitrage

Synthetic Positions

Options Strategies

Options Strategy Finder

Outlook on Underlying:

Profit Potential:

Loss Potential:


No. Legs:

Join the Discussions @ The Options Forum

Beginners Questions

Advanced Strategy Talks

RSS Feed Widget

Trading Ideas & Opportunities

Home | About Us | Terms of Use | Disclaimer | Privacy Policy | Sitemap

Copyright 2016. - All Rights Reserved.