Conversion Arbitrage

Conversion arbitrage is a risk-free strategy that exploits price differences between an asset and its corresponding options. It involves buying the underlying asset, selling a call option, and buying a put option at the same strike price and expiration.

This locks in a guaranteed profit if the cost of the options and the asset are out of alignment. The strategy relies on the principle of put-call parity, which dictates the relationship between these instruments.

Conversion arbitrage is a classic strategy used by institutional traders to capture small, risk-free returns. In the digital asset space, it can be used to capitalize on funding rate differences or mispriced futures.

It requires significant capital and efficient execution to be profitable, as the margins are often razor-thin. It is a prime example of how derivatives markets maintain efficiency through the actions of arbitrageurs.

While it carries little market risk, it is subject to execution and counterparty risks.