Conversion option strategy
Conversion buys the future and hedges it with a synthetic short: a bought Put and a sold Call at the same strike. The legs cancel out at expiry, locking in a fixed amount if the call is priced rich relative to the put and the future.
Payoff at expiry
Nifty, lot size 65 · Nifty future 22,650 · 27 Oct 2026Legs
| Action | Option | Strike | Lots | Qty | Premium |
|---|---|---|---|---|---|
| BUY | Future | – | 1 | 65 | 22,650 |
| BUY | ATM Put | 22,650 | 1 | 65 | ₹290.71 |
| SELL | ATM Call | 22,650 | 1 | 65 | ₹290.51 |
How it works
- Buy 1 lot of the future at 22,650.
- Buy 1 ATM put at the 22,650 strike for ₹290.71, paying the premium.
- Sell 1 ATM call at the 22,650 strike for ₹290.51, collecting the premium.
- Whatever Nifty does, the legs offset: the result at expiry is ₹0, fixed when you enter.
At any level the result is the same, about ₹0 at these prices: the legs cancel out, so all you lock in is the small gap between the prices you trade at.
Set-up: Buy 1 lot Future, Buy 1 lot ATM Put and Sell 1 lot ATM Call at the same strike.
How the Greeks affect it
When to use
When the call premium less the put premium is more than the futures price less the strike, after brokerage and taxes.
- Payoff does not depend on the market direction.
- Shows put-call parity at work.
- Common trade for arbitrage desks.
Things to watch
- The edge is usually tiny and can vanish after costs.
- Three legs must be filled at the right prices together.
- Margin is locked till expiry.
Conversion: questions
What is a Conversion strategy?
Conversion buys the future and hedges it with a synthetic short: a bought Put and a sold Call at the same strike. The legs cancel out at expiry, locking in a fixed amount if the call is priced rich relative to the put and the future.
When should you use a Conversion?
When the call premium less the put premium is more than the futures price less the strike, after brokerage and taxes.
How do you set up a Conversion?
Buy 1 lot Future, Buy 1 lot ATM Put and Sell 1 lot ATM Call at the same strike.
What is the maximum profit of a Conversion?
Fixed: the strike less the futures price plus the call premium less the put premium, regardless of where the underlying closes.
What is the maximum loss of a Conversion?
Fixed and known upfront. The position loses only if it was entered above fair value or costs eat the edge.