Article Risk Reversals for Stocks using Calls and Puts

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A “Risk Reversal Strategy” offers a big potential pay-off for very little premium. While risk reversal strategies are widely used in the forex and commodities options markets, when it comes to equity options, they tend to be used primarily by institutional traders and seldom by retail investors. Risk reversal strategies may seem a little daunting to the option neophyte, but they can be a very useful “option” for experienced investors who are familiar with basic puts and calls.
Risk reversal definedThe 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. If the cost of buying the call is greater than the premium received for writing the put, the strategy would involve a net...

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