A Risk Reversal is similar to a Combo or Synthetic Long Stock strategy and involves going Long of a Call Option and Short a put.
The difference between risk reversals and Combo strategies is that the former uses Out Of The Money Options (both call and put sides). Usually this is done to take advantage of Volatility skew (higher lower Implied Volatility of Options at different strike prices).
Contributed by: Ralph Windsor
The difference between risk reversals and Combo strategies is that the former uses Out Of The Money Options (both call and put sides). Usually this is done to take advantage of Volatility skew (higher lower Implied Volatility of Options at different strike prices).
External Links
What is a risk reversal?http://www.volcube.com/resources/options-articles/what-is-a-risk-reversal/
Volcube.com article about risk reversals and their role in delta hedging and options as volatility plays.
Why big traders use 'risk reversals'http://www.optionmonster.com/news/article.php?page=why_big_traders_use_risk_reversals_43842.html
Options Monster article on the mechanics of Risk Reversals, especially to take advantage of volatility skew.
Want a Low-Cost Way to Play the Upside? Try a Risk Reversalhttp://www.schwab.com/public/schwab/nn/articles/Want-a-Low-Cost-Way-to-Play-the-Upside-Try-a-Risk-Reversal
Schwab.com article about trading risk reversals.
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