Conversion

In theory, yes - when put-call parity is violated. In practice, execution risk (prices move while entering 3 legs), transaction costs, and carry costs can eliminate the profit. With American options, early assignment changes timing but not outcome. 'Risk-free' assumes perfect execution at calculated prices.

Typically A$5-50 per contract on the rare occasions true arbitrage exists. Mispricings are usually A$0.05-0.20 per share. After retail transaction costs (A$20-50 for 3 legs), most apparent opportunities become losses. Professionals capturing A$0.10/share on 1000 contracts make A$100 - meaningful for them, not for you.

Temporary supply/demand imbalances, large orders moving one leg, dividend estimate differences, market stress, or errors. Market makers usually correct violations within seconds to minutes. Persistent violations often indicate you're missing something (dividend, corporate action, etc.) rather than true arbitrage.

For the guaranteed outcome, yes. You can exit early if the mispricing reverses in your favor (buy back conversion at lower price than you sold it). But early exit adds more transaction costs and may not be profitable. Generally, conversions are hold-to-expiration strategies.

Theoretically yes, but practically only on liquid stocks with tight option spreads (BHP, CBA, NAB, etc. on ASX). Illiquid options have wide bid-ask spreads that eliminate arbitrage. You also need sufficient option volume to execute all three legs.

Dividends should be reflected in option pricing (lower C-P when dividend expected). If the market underestimates the dividend, conversions appear more profitable. But: Call holders may exercise early to capture dividends, changing your timing. Always factor dividend into calculation and plan for pre-ex-date assignment.

Calculate C-P for conversion (sell synthetic, using call bid - put ask) vs P-C for reversal (buy synthetic, using put bid - call ask). The difference between these and theoretical tells you which direction (if any) has arbitrage. If neither exceeds costs, no trade exists.

Higher rates increase carry cost (cost of holding stock) and increase theoretical C-P. If actual C-P doesn't adjust to rate changes quickly, arbitrage may appear. Also, your personal borrowing/lending rate affects whether conversion beats alternatives (e.g., bank deposit).

ATM strikes typically have best liquidity and tightest spreads, making execution easier and cheaper. OTM or ITM strikes may occasionally show larger apparent mispricing, but wider spreads often make them unprofitable after execution. Stick to near-ATM for best results.

If assigned, you deliver stock at strike price. Your put remains (worthless if stock was above strike). Net result: You received the strike price early instead of at expiration. Same economic outcome, just accelerated. No action needed unless you want to reinvest the proceeds.

Automated systems monitor parity across thousands of strike/expiration combinations in real-time. Alert threshold is typically A$0.02-0.05 mispricing (profitable after their near-zero costs). Execution is algorithmic, completing all legs in milliseconds. They may execute 10-50 conversions daily for small but consistent profits.

Large institutional orders moving one option, dividend uncertainty/announcement, market stress causing bid-ask widening, index rebalancing flows, and occasionally market maker inventory imbalances. Opportunities cluster around events and are quickly arbitraged away. Predictive positioning before events is more profitable than reactive trading.

Stocks like BHP trade on ASX and LSE with options on both. If option pricing differs between exchanges (after currency adjustment), cross-market arbitrage is possible: Convert on one exchange, reverse on another. Complications include FX risk, timing (different trading hours), and regulatory differences.

Market makers use conversions to manage inventory. If they're long too many calls, they can convert (sell calls) to neutralize. Even if the conversion isn't profitable in isolation, it reduces risk. This is why some 'mispricings' exist - they serve a hedging purpose for the market maker.

Components: Real-time options data feed (ASX quotes), parity calculation engine (C-P vs theoretical for all strikes), dividend database (expected amounts and dates), alert system (threshold-based notifications), execution integration (direct order routing). Challenge: Data costs A$500-5000/month for real-time, and latency matters - by the time retail sees opportunity, it's gone.