> For the complete documentation index, see [llms.txt](https://guide.laevitas.ch/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://guide.laevitas.ch/option-strategies/risk-reversal.md).

# Risk Reversal

## Long Risk Reversal

{% hint style="info" %}
A Long Risk Reversal is a bullish strategy which involves the simultaneous sale of an OTM Put and a purchase of an OTM Call of the same expiration. This can be done for either a net credit or debit, depending on the strikes chosen. 
{% endhint %}

**Payoff Diagram:**

![](https://1780133611-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2F5XlTHrw6jWA1Duk8yCcW%2Fuploads%2F0rJPruaV1nalQzDR5EXn%2FLong%20RR.png?alt=media\&token=2ba5312a-1f35-4dc7-b968-59b10abd1c2c)

**Direction Assumption:** Bullish

**Maximum Profit:** Unlimited 

**Maximum Loss:** Unlimited

**Breakeven Price:** \
• If net credit received: Short Put strike minus credit received.\
• If net debit paid: Long Call strike plus debit paid.

**Theta:** Negligible effect\
The net effect of time decay is negligible as it will erode the value of the Long Call in a similar extent as the Short Put.

**Volatility:** \
**•** If net credit received: \
If Volatility decreases -> Positive Effect.\
If Volatility increases -> Negative Effect. \
\
**•** If net debit paid:\
If Volatility decreases -> Negative Effect.\
If Volatility increases -> Positive Effect. 

## Short Risk Reversal

{% hint style="info" %}
A Short Risk Reversal is a bearish strategy which involves the simultaneous sale of an OTM Call and a purchase of an OTM Put of the same expiration. This can be done for either a net credit or debit, depending on the strikes chosen. 
{% endhint %}

**Payoff Diagram:**

![](https://1780133611-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2F5XlTHrw6jWA1Duk8yCcW%2Fuploads%2FNg6rQHW2aLRSMT03Ue1V%2FShort%20RR.png?alt=media\&token=74be07c6-8cf8-4466-ab25-c48d41836f89)

**Direction Assumption:** Bearish

**Maximum Profit:** Unlimited 

**Maximum Loss:** Unlimited

**Breakeven Price:** \
• If net credit received: Short Call strike plus credit received.\
• If net debit paid: Short Put strike minus debit paid.

**Theta:** Negligible effect\
The net effect of time decay is negligible as it will erode the value of the Long Put in a similar extent as the Short Call.

**Volatility:** \
**•** If net credit received: \
If Volatility decreases -> Positive Effect.\
If Volatility increases -> Negative Effect. \
\
**•** If net debit paid:\
If Volatility decreases -> Negative Effect.\
If Volatility increases -> Positive Effect.