Investing - Theory, News & General • Risk free conversion arbitrage

To preface this options post, this is solely a financial curiosity and not a change in philosophy. I enjoyed the detail in Annette Thau's Bond Book (recommended on this forum) and am now enjoying McMillan's Options as a Strategic Investment book (also recommended on this forum).

In the book, one of the sections is about conversion arbitrage, where you buy 100 shares, sell a call, and buy a put, both at the same strike and expiration. Since one of those options will be exercised at expiration, the difference between the amount paid to enter the position and the strike is a risk free return*.

In the book, McMillan states several times that for the public options participant, there's no point in engaging in conversions because more sophisticated arbitrageurs will have already taken advantage of any mispricing. Reading about it online, the general sentiment is that your return in best case will match that of treasury yields for the same reason McMillan shared.

For fun, I entered two positions today expiring in 46 days totaling ~$3000 with a return of ~$30 at expiration after commissions, which comes out to be around 7.9% annualized. The current 1-month and 3-month Treasury yields are 3.7-3.8%.

My curiosity is whether when people say that HFTs and sophisticated arbitrageurs will have already taken all the available arbitrage opportunities, do they not care about these small, unscalable opportunities and is 2-3% over other risk free rates normal?

* McMillan listed a couple risks with this. Some of them were the same as other risk-free investments, like interest rates changing. The one that was unique to conversions was pin risk where the underlying expires at the strike and you aren't sure which option is going to be exercised. I'm not sure if that's worth the additional 2-3%?

Statistics: Posted by DinkinFlicka — Mon Aug 31, 2026 8:05 pm