01 Jan 2001, Energy Risk glossary , Energy Risk
To take advantage of mispriced options by creating a synthetic long futures position and hedging it by selling futures contracts against it.
A trader may buy an undervalued call, at the same time selling a fairly valued put and buying a futures contract. The same strategy could be applied if the put was undervalued. The ability to undertake this riskless arbitrage relies on put-call parity.
*see also box, conversion