A Conversion is an arbitrage strategy in options trading that can be performed when options are overpriced relative to the underlying stock. This strategy falls in the arbitrage category; thus, if it is executed well then you can get riskless profit.
In this post I will explain with example how this strategy can be carried out. More examples of Conversion strategies are on this page. To do a conversion, the trader buys the underlying stock and offset it with an equivalent synthetic short stock (long put + short call) position. The underlying stock in this case will be under priced, or, will be at price less than the synthetic short.
On 22 Nov 2016, Marico was trading at 251.55. Refer below screenshot for details. Also note the price for the 260 call and put options.
To implement the strategy, 260 call option is sold for 1.2. Put option is bought at 7.75 and the stock is bought at 251.55. Picture below shows more details about the quantity which depends on lot size, Margin, and other details.
The graph below depicts how this strategy will fare for different closing price of the underlying on expiry. You will notice that irrespective of the value of the underlying, at expiry the strategy gives a positive return.
The strategy provides a return of 1.12% on the Total Investment
Given that the investments are generally over shorter horizon, the annualized returns are greater. In this case the 1 Month return is 17.22%. This is further amplified in case the strategy is executed nearer to expiry.