Reversal

In theory with European options, perfect execution, and stable borrow, yes. In practice: early exercise risk (American options), borrow recall risk, execution risk, and borrow rate changes exist. Never assume truly risk-free.

Almost certainly not. Borrow access, costs, and execution disadvantages typically exceed any mispricing. Professional arbitrageurs with better infrastructure capture opportunities instantly.

Synthetic short (Short call + Long put) replicates shorting stock for directional bets. Reversal ADDS actual short stock to a synthetic long (Long call + Short put), creating a neutral arbitrage position. Synthetic is directional; reversal is neutral.

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

You need: short selling approval, options trading approval (for short puts), and margin account. These requirements are standard for most active trading accounts but verify with your broker.

Calculate: Stock - Call + Put = Proceeds. Compare to Strike + Borrow Cost + Dividends + Commissions. If Proceeds > (Strike + All Costs), profit exists. Also consider interest earned on proceeds. Often apparent profit disappears when all costs are included.

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

You OWE dividends when short. A S$0.30 dividend × 1,000 shares = S$300 cost. This is already partially priced into options (puts more expensive, calls cheaper around dividends), but you must verify the pricing is accurate.

You buy stock at strike, closing your short. You're left with long stock + long call (bullish position). The arbitrage is disrupted. Sell the new long stock and the call to exit, or hold if you want the bullish position.

Yes, a reversal is like borrowing money. You receive cash today and pay the strike at expiration. If the implied borrowing rate is lower than alternative financing, it could be attractive. Compare: (Strike - Proceeds) / Proceeds × (365/Days) = implied rate.

Automated systems continuously calculate theoretical put-call parity for all strikes, monitor borrow rates in real-time, and compare to market prices. When deviation exceeds cost threshold (often just a few basis points), orders execute in milliseconds.

True persistent violations are rare in liquid markets. Apparent violations often reflect: hard-to-borrow costs already in options pricing, dividend uncertainty, early exercise premium, or illiquidity. Professionals price these factors; apparent opportunities often aren't real.

Options prices include an implied borrow rate. For expensive-to-borrow stocks, puts are elevated and calls are depressed to reflect this. True reversal arbitrage exists only when actual borrow rate is lower than the rate implied in options. This is rare.

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 for reversal entry before correction. These windows are often too short for retail.

Institutions may use reversals across entities in different jurisdictions, exploit different treatments of options vs short sales, or use for balance sheet/capital management. These structural advantages are unavailable to retail and often drive institutional arbitrage.