First, let me point you to my Glossary of Terms. Review this if you ever have a question regarding my “language” that I use on twitter.
Now, on to the Risk Reversal (R/R). The goal of this trade is:
- Own a $CALL option on the underlying stock
- Be short a $PUT option on the underlying stock
If you can do the above trade for a credit, you are amazing – it often requires a small debit however.
So why this approach? When is it appropriate to use this strategy? Well, let’s have a look at a real trade that I just put on:
Let’s break down the above trade:
- I am long the June 29 weekly 50 call
- I am short the June 29 weekly 49 put
This trade was done for a debit of $.35 and also means that I am at risk of being put the ETF at $49. The goal here is have the $SPX catch a bounce this week so that the 50 strike call increases in value (and thus sell before expiration Friday). If that happens, then I would allow the 49 put to expire on Friday.