Conversion

In theory with European options and perfect execution, yes. In practice: early exercise risk (American options), execution risk, operational risk, and counterparty risk exist. Never assume truly risk-free.

Almost certainly not. Stamp duty (0.2%) in Singapore, plus commissions and spreads, typically exceed any mispricing. Professional arbitrageurs with better technology and costs capture any opportunities instantly.

Temporary supply/demand imbalances, large orders, dividend expectations, or market maker inventory can cause brief mispricings. These are usually corrected within seconds by arbitrageurs.

You need to buy the full stock position. For 1,000 shares at S$33 = S$33,000 plus margin for the short call. It's capital-intensive for the small returns involved.

The position settles at exactly the strike value. If stock is above strike: stock called away (short call exercised), put worthless. If below: you exercise put (sell stock at strike), call worthless. Either way, you receive strike × shares.

Calculate: Stock + Put - Call + Stamp Duty + Commissions + Interest. Compare to Strike. If total cost < Strike, there's gross profit. But also consider opportunity cost of capital (interest you could earn elsewhere). Often apparent profit disappears when interest is included.

Conversion when stock is cheap relative to synthetic (buy stock). Reversal when stock is expensive relative to synthetic (short stock). Reversal avoids stamp duty but has stock borrow costs. Use whichever direction the mispricing indicates.

Expected dividends reduce conversion cost because you receive them as stock holder. The put-call parity formula adjusts: Stock + Put - Call = PV(Strike) + PV(Dividends). Dividends are typically already priced in, so it's hard to gain edge.

You deliver stock at strike, receive strike price in cash. You're left with long put only. If stock has risen, put is OTM and loses value. The 'arbitrage' is disrupted. Manage by closing put and assessing overall P&L.

Yes, conversion is like lending money (pay now, receive strike later). If the implied rate beats other lending options, it could be attractive. Compare: (Strike - Conversion Cost) / Conversion Cost × (365/Days) = implied annual rate.

Automated systems continuously calculate theoretical put-call parity for all strikes and expirations. When market prices deviate beyond cost threshold, orders execute in milliseconds. Systems monitor across multiple venues simultaneously.

True persistent violations are rare in liquid markets. Apparent violations often reflect: hard-to-borrow stocks, dividend uncertainty, early exercise premium, or illiquidity. Professional desks price these factors in; retail often doesn't.

Conversion at K1 minus Conversion at K2 = Box spread. Alternatively: Conversion at K1 + Reversal at K2 = Box spread. These relationships allow arbitrageurs to construct complex positions and identify relative mispricings across the strike ladder.

Skew affects relative put-call pricing at each strike. Rapid skew changes can temporarily violate put-call parity. Sophisticated traders monitor skew dynamics and may find brief windows where conversion/reversal becomes attractive before correction.

Institutions may use conversions across entities in different jurisdictions, exploit different tax treatments of options vs stock, or use for balance sheet management. These structural advantages are unavailable to retail and are the main source of institutional arbitrage profit.