📚 Stock Market Glossary

Put-Call Parity is a fundamental no-arbitrage relationship governing European-style options, defining the static equilibrium between a Call price, a Put price, the underlying Stock, and the present value of the Strike price.

When market dislocations violate this parity—such as calls becoming overpriced relative to puts—traders execute a 'Conversion' arbitrage: buying the underlying stock, buying the underpriced put, and selling the overpriced call to lock in an absolute risk-free synthetic bond return.

• Pure Market-Neutral Profit: Completely eliminates market delta, vega, and gamma risk, immunizing the portfolio against all directional price swings.
• Reversal (Reverse Conversion): When puts become overpriced relative to calls, traders short the stock, buy the call, and sell the put to harvest the dislocation.
• Foundational Microstructure Anchor: Automated algorithmic arbitrage desks continuously enforce Put-Call Parity, preventing pricing dislocations across derivative exchanges.

Net arbitrage profit must exceed financing costs, transaction fees, and dividend adjustments. Monitoring large conversion flows helps identify strike pinning dynamics near expiration.