Strategy

Author: Sunny Zhang, Victoria Li

Put-Call Parity

DevilTongues relies on deviations from put-call parity, a fundamental no-arbitrage relationship between a call and a put with the same strike and expiration.

C - P = S - K × e-rT

Arbitrage Strategies

Reverse Conversion (Implied Rate > Benchmark)

When the synthetic short stock is overpriced relative to the underlying, the implied rate exceeds the benchmark and a reverse conversion may be attractive.

Positions:

  1. Sell call at strike K
  2. Buy put at strike K
  3. Buy underlying stock

Conversion (Implied Rate < Benchmark)

When the synthetic long stock is underpriced relative to the underlying, the implied rate is below the benchmark and a conversion may be attractive.

Positions:

  1. Buy call at strike K
  2. Sell put at strike K
  3. Short underlying stock

Risk Considerations

  • Multi-leg execution risk across options and stock legs
  • Pin risk near expiration when S ≈ K
  • Early assignment risk for American-style short options
  • Dividend effects that can shift parity relationships
  • Transaction costs and slippage that can erase thin margins
  • Margin requirements and financing constraints