Conversion

A Conversion is a strategy typically used by floor traders to capitalize on price discrepancies that arise between the stock and options markets. A Conversion is constructed from a Synthetic Short Stock (a short call and a long put at the same strike), offset by a long position in the underlying stock.

Conversions are used when calls are overpriced relative to puts and when the underlying stock lags a gain anticipated by the options market. Assuming a sufficient gap exists to cover trading costs, a Conversion produces a riskless profit. If you set up a Conversion and find that the profit line falls below the X-axis, you can effect a reversal of fortunes by selling your Conversion short. That strategy is known as a Reverse Conversion, or Reversal for short. It can be emulated by complementing the buy/sell sense of the options in the Conversion, i.e. by buying the call and selling the put, thereby saving you from re-entering any costs you have modeled here.

That said, significant caveats apply.