Risk Reversal
A cheap synthetic directional bet using two options
Definition
A risk reversal is an options strategy involving buying a call option and selling a put option (or vice versa) at different strikes with the same expiration date. A long risk reversal (buy call, sell put) creates a bullish synthetic long position cheaply or for a net credit. A short risk reversal (sell call, buy put) is bearish. Risk reversals are also used as a sentiment indicator in forex — the skew between call and put implied volatility measures directional demand.
Example
You are bullish on Gold. You sell a $1,900 put for $15 and buy a $2,100 call for $12. Net credit: $3. If Gold rises above $2,100, you profit fully. If Gold falls below $1,900, you lose (the short put assignment risk). Between $1,900 and $2,100, you keep the $3 credit. This structure lets you express a bullish view with limited upfront cost.
Related Terms
Frequently Asked Question
What is a risk reversal?
A risk reversal buys a call and sells a put (or vice versa) for a synthetic directional position. Long risk reversals are bullish; short are bearish. In forex, risk reversal skew measures market directional sentiment.
APA Citation
Last updated:
· Source: VixShield Trading Glossary — From SPX Mastery by Russell Clark
⚠️ Not financial advice. This definition is educational content from the SPX Mastery book series by Russell Clark (VixShield). Past performance is not indicative of future results. Trading options involves substantial risk of loss and is not appropriate for all investors. Always paper trade before risking real capital.