<p>What does the option “convert to web application” do if I select it in visual studio? If I do convert my site to a web application what are the advantages? Can I go back?</p>

Well, it converts your web site to a web application project. As for the advantages, here is some further reading:
MSDN comparison --
Comparing Web Site Projects and Web Application Projects
Webcast on ASP.NET --
Web Application Projects vs. Web Site Projects in Visual Studio 2008
"In this webcast, by request, we examine the differences between web application projects and web site projects in Microsoft Visual Studio 2008. We focus specifically on the reasons you would choose one over the other and explain how to make informed decisions when creating a Web solution
"
The primary difference (to me) between a web application project and a web site is how things gets compiled.  In web sites each page has its code-behind compiled into a separate library, whereas in web applications all code-behind gets compiled into a single library.
There are advantages and disadvantages to both, it really depends. It's also often a matter of
opinion
.