Like the conversion and other arbitrage strategies, the reversal involves buying something in one market and simultaneously selling it in another to capitalize on whatever small discrepancy exists. Reversals are primarily a Floor Trader strategy.

Risk Reversal

Sometimes, to capitalize on minor price discrepancies between calls and puts, floor traders and other professionals will put on a trade known as a reverse conversion or reversal. As the name implies, this is exactly the opposite of a conversion. Traders do reversals when options are relatively underpriced. To put on the position, the trader would sell stock on the open market and buy the options equivalent in the option market.

When options are relatively overpriced, traders do conversions. Theoretically, conversions and reversals have very little risk because the profit is locked in immediately. For this reason, traders will do conversions and reversals as many times as the market will allow. The idea behind a reversal is to create what is known as a synthetic long position and offset it with a short position in the same underlying stock.

The synthetic long position is created by buying a call and selling a put with the same strike price and expiration. At the same time, the options are priced as follows:.

Individual investors and most other off-the-floor traders don't have an opportunity to do conversions and reversals because price discrepancies typically only exist for a matter of moments.

Professional option traders, on the other hand, are constantly on the lookout for these opportunities.

Put-Call Parity; Conversion Arbitrage; Reverse Conversion Arbitrage

As a result, the market quickly returns to equilibrium. Didn't find what you needed?

Options arbitrage - Wikipedia

Content and tools are provided for educational and informational purposes only. Any stock, options, or futures symbols displayed are for illustrative purposes only and are not intended to portray a recommendation to buy or sell a particular security.

Products and services intended for U. Online trading has inherent risk.

System response and access times that may vary due to market conditions, system performance, volume and other factors.

Options and futures involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options and Risk Disclosure Statement for Futures and Options on our website, prior to applying for an account, also available by calling An investor should understand these and additional risks before trading.

Multiple leg options strategies will involve multiple commissions.

Member SIPC "Schwab" and optionsXpress, Inc. Deposit and lending products and services are offered by Charles Schwab Bank, Member FDIC and an Equal Housing Lender "Schwab Bank". At the same time, the options are priced as follows: