Risk Reversal

Long Risk Reversal

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.

Payoff Diagram:

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

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.

Payoff Diagram:

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.