“The most basic risk reversal strategy consists of selling (or writing) an out-of-the-money (OTM) put option and simultaneously buying an OTM call.
This is a combination of a short put position and a long call position. Since writing the put will result in the option trader receiving a certain amount of premium, this premium income can be used to buy the call.” – Investopedia
The two basic variations of a risk reversal strategy used for speculation are:
“Write OTM Put + Buy OTM Call; this is equivalent to a synthetic long position since the risk-reward profile is similar to that of a long stock position. Known as a bullish risk reversal, the strategy is profitable if the stock rises appreciably, and is unprofitable if it declines sharply.” – Investopedia
“Write OTM Call + Buy OTM Put; this is equivalent to a synthetic short position, as the risk-reward profile is similar to that of a short stock position. This bearish risk reversal strategy is profitable if the stock declines sharply, and is unprofitable if it appreciates significantly.” – Investopedia
How can you utilize this in your trading?
You may have heard Wall St. Jesus call out a risk reversal in a certain name during the broadcast. What does this mean to you and how can you utilize this in your trading strategy you may ask?
When a trader puts on a risk reversal, not only do they have the conviction to buy calls or puts, they are also willing to finance it by selling premium. The inherent risk involved with selling options contracts makes this type of trade a higher conviction trade compared to simply buying the calls or puts alone.
Questions or suggestions?
Please reach out if you have any further questions or suggestions.