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To buy/sell mispriced options and Hedge the Market risk using only options, unlike the conversion or the Reversal, which use futures contracts. If a certain strike put is underpriced, the trader buys the put and sells a call at the same strike, creating a synthetic Short futures Position. To get rid of the Market risk, he sells another put and buys another call, but at different strike prices.

See also Convergence trade
Posted by  Privatebanking.com
 
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