Long stock, long put, short call at the same strike; a locked-in arbitrage package that earns interest rather than market direction.
A conversion is long stock plus a synthetic-short-stock. The two cancel, leaving a position whose value at expiration is fixed at the strike. Whatever the stock does, the package settles the same.
Market makers put them on when the options are slightly mispriced against put-call-parity, capturing a few cents of edge plus the interest differential. Retail traders almost never see the opportunity, because it disappears in milliseconds, but understanding it explains why parity holds so tightly.
Example: XYZ at $50.00. Buy 100 shares at $50.00, buy the $50 put at $2.05, sell the $50 call at $2.35. Net outlay $49.70 per share to receive $50.00 at expiration — $30 locked in per contract, before financing and fees, regardless of where XYZ goes.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Buying a call: payoff at expiry. A 105-strike call bought for 3 loses that whole 3 if the price finishes at or below 105, breaks even at 108, then gains a dollar for every dollar higher. The loss is capped at the premium; the upside is not capped.Time decay of an option's value. The part of an option's price that is only time — its extrinsic value — drains away every day and must reach zero at expiry. The slide is gentle months out and steepest in the final weeks, which is what traders call theta.
Educational only, not advice. Spotted an error? Post in Site Feedback.