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:
- 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.
- 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.
- If the stock recovers some, say to $92, then the trade could potentially be a wash.