What is Conversion Arbitrage?

Conversion arbitrage is a way to profit from options hedging. In this arbitrage transaction, the trader buys a put option, sells a call option, and then enters a futures contract. The strike price and the expiration month of the put option and the call option must be the same. The expiration month of the futures contract To be the same as the option contract expiration month, the price should be as close as possible to the strike price of the option. Under this condition, if the futures price is higher than the option strike price before the expiration date, the trader's short call option contract will be fulfilled and will automatically oppose the trader's long futures position. The long put option If the futures price is lower than the strike price of the option at the time of expiry, the long put option of the trader will be exercised and will automatically oppose the long futures position of the trader, and the short call option can be invalidated. ^[1]

Conversion arbitrage

Conversion arbitrage is a way to profit from options hedging. In this arbitrage transaction, the trader buys a put option, sells a call option, and then enters a futures contract. The strike price and the expiration month of the put option and the call option must be the same. The expiration month of the futures contract To be the same as the option contract expiration month, the price should be as close as possible to the strike price of the option. Under this condition, if the futures price is higher than the option strike price before the expiration date, the trader's short call option contract will be fulfilled and will automatically oppose the trader's long futures position. The long put option If the futures price is lower than the strike price of the option at the time of expiry, the long put option of the trader will be exercised and will automatically oppose the long futures position of the trader, and the short call option can be invalidated. ^[1]

Before the futures contract expires, when the futures price is higher than the strike price, the trader's short call option will be exercised and will automatically oppose the trader's long futures position, and the long put option will be invalidated. If the futures price is lower than the strike price before the futures contract expires, the trader's long put option will be exercised and will automatically oppose the trader's long futures position, and the short call option will be cancelled at its expiration.

The strike price and the expiration month of the put and call options must be the same

The futures contract, ie the expiration month, must be the same as the option contract expiration month, and the price should be as close to the strike price of the option as possible.

Conversion arbitrage refers to the arbitrage method in which a trader buys a put option, sells a call option, and then buys a futures contract.

There are two conditions for conversion arbitrage: first, the strike price and the expiration month of the put and call options must be the same; Strike price.

If before the contract expires, the futures price is lower than the strike price of the put option, the put option bought by the trader will be exercised, and will automatically oppose the long futures position of the trader, and the sold call option will be invalidated. If before the contract expires, if the futures price is higher than the option strike price, the trader's short call option contract will be fulfilled and will automatically hedge with the trader's long futures part, and the long put option will expire.

Calculation of profit The general formula for calculating the profit obtained from conversion arbitrage is as follows:

Profit from conversion arbitrage = (call option premium-put option premium)-(futures price-option exercise price)