SteadyOptions is an options trading forum where you can find solutions from top options traders. TRY IT FREE!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

How To Trade Risk Reversals


A risk reversal is a strategy that involves selling a put and buying a call with the same expiry month. This is also known as a bullish risk reversal. A bearish risk reversal would involve selling a call and buying a put. Today we’re going to examine the bullish risk reversal.

The following is a guest post by our good friend Gavin Mcmaster from OptionsTradingIq.

 

Recently I posted a chart on my blog, which is also shown below.

 

SPX Box.PNG

Image Credit: Chris Ciovacco

 

It’s hard to argue that this chart looks anything but bullish.

 

Stocks may be extended short-term and due for a pullback, but if a trader wanted to take a bullish position a risk reversal provides can be a good option.

 

BE PREPARED TO TAKE OWNERSHIP

 

The key with a bullish risk reversal is that you need to be prepared to buy the underling at the strike of the short put. If the underlying is below the strike price at expiry, the stock will be put to you.

 

The beauty of the risk reversal is that it takes advantage of the inherent skew in options. Generally, implied volatility is higher for puts than calls.

 

Assuming a trader is bullish and thinks the SPY will head higher by March, he could construct a trade that looks something like this:

 

Capture.PNG

 

Here the trader is choosing the 25 delta calls and puts, giving an overall exposure level of 49 delta. In the short-term, the position will perform similar to owning 49 shares of SPY. Of course, as the underlying changes, so two will the Greeks.

 

The beauty of the trade is that you can own upside exposure and get paid if the stock goes nowhere. If the stock falls, you end up taking ownership for a price less than when the risk reversal was initiated.

 

WHEN TO TRADE RISK REVERSALS

 

A great time to use risk reversals is when a stock has had a sharp selloff. During these times implied volatility for the puts can go through the roof as traders try to protect against further downside. High risk tolerant traders can even trade leveraged risk reversals in this case. Due to the high premium received for selling puts during market panics, the trader can buy 2, 3 or even 4 calls for a net cost of $0.

 

Just think how this strategy would have performed during recent selloffs.

 

These trades also work well if the trader is expecting a minor pullback but realizes it might not happen. If markets continue moving higher, he gets partial benefit and if stocks fall he takes ownership at a lower price.

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Try It Free

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • Options: The Zero Sum Game Myth

    Zero-sum is a situation in game theory in which one person’s gain is equivalent to another’s loss, so the net change in wealth or benefit is zero. A zero-sum game may have as few as two players, or millions of participants. Options trading is considered by many a zero sum game. But is it really a zero sum game?

    By Kim,

    • 0 comments
    • 245 views
  • SteadyOptions 2016 - Year In Review

    2016 marks our firth year as a public service. We had a good year overall. We closed 127 trades in 2016. The model portfolio produced 40.1% compounded gain on the whole account based on 10% allocation. The winning ratio was pretty consistent around 66%. We had three losing months in 2016.

    By Kim,

    • 0 comments
    • 215 views
  • Brexit Continues To Affect The Stock Market

    The end of 2016 may well have seen high consumer spending and a low unemployment rate, but there are concerns for 2017.The people of the UK voted for their nation to exit the European Union - a move known as Brexit, and the world awaits with different views to see the impact.

    By Kim,

    • 0 comments
    • 132 views
  • Few Facts About Implied Volatility

    The following infographic describes the facts about implied volatility, where does it come from and how to calculate implied volatility. Implied volatility is an estimated volatility of a security’s price. It is very helpful in calculating the probability and is used to adjust the risk control and trigger trades.

    By Kim,

    • 3 comments
    • 396 views
  • Early Exercise: Call Options

    How would a trader like you decide to do early exercise? Say you bought calls when they were trading in the 1.0 -> 2.5 range, now underlying has risen so that calls trade bid-ask at 4.0 / 4.8 and there is strong possibility of it going higher. Also assume in another case that they trade in the 6.0 to 7.0 range.

    By MarkWolfinger,

    • 0 comments
    • 247 views
  • How To Trade Risk Reversals

    A risk reversal is a strategy that involves selling a put and buying a call with the same expiry month. This is also known as a bullish risk reversal. A bearish risk reversal would involve selling a call and buying a put. Today we’re going to examine the bullish risk reversal.

    By Kim,

    • 0 comments
    • 1,015 views
  • What Is The Best Options Strategy?

    I'm often asked by novice options traders what is the best options strategy. The answer is that there is no such thing "the best options strategy". Each strategy has its pros and cons. Each strategy will work the best under certain market conditions, and no strategy will work under all market conditions.

    By Kim,

    • 0 comments
    • 4,932 views
  • Using Options To Hedge Investments

    Options inherently have been met with much speculation, and anyone who trades them knows this. Many bankers and financial advisors steer clear of options because of their potential risk. Are they correct in doing so? I don't believe they are. Options when used correctly can provide better annual returns than a traditional buy and hold method.

    By Kim,

    • 0 comments
    • 670 views
  • Best Trading Articles 11/19/16

    Reading as much as we can about trading always helps us to improve and become better traders. I'm pleased to share some of the best trading articles, podcasts and videos from some of my favorite traders, bloggers and educators. If you came across an interesting article please share it in the comments section.

    By Kim,

    • 0 comments
    • 874 views
  • Buy the Winners: the Power of Momentum

    Momentum is a phenomenom that tends to leave academics scratching their heads as it shouldn't really exist in a world of perfectly efficient markets.  Yet for 100 years a simple rules based, quantitative approach would have provided the opportunity to earn increased returns with reduced volatility and drawdowns vs. a buy and hold approach.

    By Jesse,

    • 0 comments
    • 1,613 views



We want to hear from you!


There are no comments to display.



Your content will need to be approved by a moderator

Guest
You are commenting as a guest. If you have an account, please sign in.
Add a comment...

×   You have pasted content with formatting.   Remove formatting

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

Loading...