Conversion/Reversal Arbitrage Scanner

What is Conversion/Reversal Arbitrage?

Conversion and reversal arbitrage exploit mispricing between a stock and its synthetic equivalent constructed from options. A conversion involves holding long stock, buying a put, and selling a call at the same strike and expiration — locking in a risk-free profit when the synthetic short (put minus call) is overpriced relative to the actual stock. A reversal is the opposite: short stock, buy a call, and sell a put — profiting when the synthetic long is cheaper than the actual stock. These strategies rely on put-call parity and are theoretically risk-free when executed correctly, though real-world frictions reduce the opportunity set.

The Math

Put-call parity states that the price of a call and put at the same strike and expiration must satisfy:

C - P = S · e(r - q)T - K · e-rT

• C = Call option price
• P = Put option price
• S = Current stock price
• K = Strike price
• r = Risk-free interest rate
• q = Continuous dividend yield
• T = Time to expiration (in years)

When the left side (C - P) deviates from the right side (forward stock price minus present value of strike), an arbitrage opportunity exists. A positive deviation suggests a conversion (sell synthetic, buy stock), while a negative deviation suggests a reversal (buy synthetic, sell stock).

Key Risks

• Early exercise: American-style options can be exercised early, especially around ex-dividend dates. Short calls on dividend-paying stocks carry assignment risk that can disrupt the arbitrage.
• Dividends: Unexpected dividend changes directly affect parity pricing. The scanner uses dividend-adjusted parity, but ex-date timing and special dividends can create surprises.
• Execution speed: These opportunities are often fleeting. By the time you see them in a screener, market makers may have already closed the gap. Execution slippage on three legs (stock + two options) compounds quickly.
• Margin requirements: Conversions require holding long stock, and reversals require short stock — both tie up significant capital and margin. The annualized return must justify the capital commitment.

Interpreting Results

• Annualized return expresses the per-share profit as a yearly rate relative to capital required. A 2% return over 30 days annualizes to roughly 24%. Higher annualized returns indicate stronger opportunities, but very short DTE trades amplify execution risk.
• Most opportunities are small — a few cents per share. This is normal. Large, obvious mispricings are rare because market makers continuously arbitrage them away. The screener surfaces the best available opportunities after accounting for dividends and interest rates.
• Dividend yield matters — high-dividend stocks tend to show more apparent mispricing that disappears once dividends are properly accounted for. The scanner adjusts for dividends, so remaining profit is net of expected dividend costs.
• Capital requirement is the approximate capital needed to execute the full three-legged position. Compare annualized return against your cost of capital to determine if the trade is worthwhile.