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

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%?

I am not entirely well informed on this, but I don't believe the HFTs or the market are ignoring small trades.

Note, I see the premium here as $16 because a straight treasury held for 46 days would yield you about $14.

First, if you needed to exit the trade to avoid pin risk, the HFTs will widen the spread to hedge their risks and it will cost most of that premium or more to trade out of it.

Also, the counter party to your trade is doing a Reversal (shorting the stock, buying the call, selling the put). Since shorting often has a cost, the counter party is willing to pay you instead of paying to borrow it. So perhaps that is baked in and the source of your 'premium'.

Finally, when you execute a conversion (Long Stock + Long Put + Short Call), aren't you effectively lending cash to the market at a fixed interest rate? Since market makers have direct access to interbank lending markets (SOFR / Treasury repo) at ~3.8%, why wouldn't they execute a conversion yielding 7.9% with cheaper borrowed cash?

I do think HFTs care about unscalable opportunities because they can aggregate mispricings into a large risk free position.

Upcoming dividends will affect things too. Are you sure the stocks you used didn't have dividends coming up?

Statistics: Posted by typical.investor — Tue Sep 01, 2026 3:02 am