The Bear R/R (Risk Reversal)

One of the often- used option trades that I utilize is the Risk Reversal (R/R). For those that are interested in Options, read on. In this post I will review a current trade that I have on in $FOSL (Fossil) that is on the Bearish side.

Here are a few messages from my twitter stream to kick things off:

The first message is a comment by me on how I viewed the reaction to their earnings report. I then show my bias to that reaction. My “to fade” list contains stocks that I want to short — and they end up on the list for many reasons. An outsized move on an earnings report is one of those reasons.

The next message shows my scaling in to my position choice: A September Risk Reversal using the 95 strike Call & Put:

  • I am Short the $95 Call
  • I am Long the $95 Put

The trade above cost me $3.00 to put in this entry. I ultimately put on the final 2/3 piece at a cost of $2.75 bringing the net to $2.83 for this trade.

So what is the goal of such a trade? Here are some scenarios:

  1. The stock continues to drift down causing the short $95 Call to drift down in value (cheaper to buy back) and the $95 Put to gain in value (sell for more than what I paid for it). This means both sides of the trade can win.
  2. If the stock stays right at the current price level to expiration, the Put would have a value above $7 and the Call would expire worthless.
  3. If the stock recovers some, say to $92, then the trade could potentially be a wash.

7 thoughts on “The Bear R/R (Risk Reversal)

  1. I just executed this trade with the $85 Call/Put for August, can you explain to me how to calculate BEP on the trade and the profit calculations if It expires below $85?

  2. BEP equals the cost you paid for the trade when compared to the Put strike. So if you paid $3 for the trade, you need price at $82 on expiry day.

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  4. yes, short a naked call is infinite risk in theory. In this case, there are a few choices to protect that upside risk including going long the stock. I chose to buy the August 95 Call this past week for less than a dime which protects me thru this coming week to expiration.

  5. My $QCOR trade is from last week, should be a good bit of info on the pieces and the work I have done it within the stream.
    Currently: I am short the Oct 34 Call, long the Oct 31 Put, and short the Sep 28w 19 Put (caps the gain on the long Put).

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