What are Reversals and Conversions?
As examples of two of the most basic components in the area of option arbitrage, reversals and conversions work hand in hand to allow the stockholder the chance to increase the profit of the stock portfolio. This is accomplished by systematically purchasing new shares of stocks (the conversion) and then selling older synthetic options (reversal) at a price that is slightly higher than the cost of purchasing the new options. On thing to keep in mind is that the application of reversals and conversions does not rely on the difference in price between the new stock options and the older options that are being sold. While the stock prices are one factor in successfully using reversals and conversions to make money, they are not the only factors to consider. The price of the call must also be taken into consideration, as well as the put for both sets of stocks. In order to ensure that an increase is made from the trading, it is important to consider every expense associated with both the pu
