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Glossary of Terms and Strategies for Options Trading
Complete Options Glossary: Strategies, Terms, Greeks, and Option Selling Techniques. Clear, concise, and suitable for both beginners and advanced traders. Learn to trade options effectively.
Strategy
Advanced, Hedging, Speculation
Risk Reversal
Combination of writing a put and buying a call, speculation on the growth of the underlying or hedging.
Detail
Risk Reversal is an options strategy that combines writing a put option and buying a call option with the same expiration but different strikes. The goal is to speculate on the rise in the price of the underlying. Writing a put option finances the purchase of a call option, which is why the strategy is often zero-cost or low-cost (zero-cost collar). In the opposite direction (for speculation on a decline), a call is sold and a put is bought (Reverse Risk Reversal).
Risk Reversal is a profitable strategy if we expect a strong movement of the underlying in one direction. It is most often used as a cheap speculation. The put statement brings income that finances the purchase of the call. It is necessary to monitor the margin on the put option written.
Optimal conditions
Expected strong movement of the underlying material in one direction (up or down).
Max profit
Unlimited when the underlying grows (standard risk reversal).
Max loss
Limited when the underlying falls to zero (value of the written put option minus the call). Potentially large if the underlying falls well below the put strike.
Risks
Risk of a sharp decline (for a put statement) if not hedged. Margin required. Requires a correct estimate of the direction of movement.
Greeks
Delta positive (for long risk reversal), Theta dependent on strike choice, Vega positive (IV growth helps long call option, harms short put option).
Variations
Reverse Risk Reversal (call write + put buy, speculation on a decline). Zero-Cost Collar (as a form of hedging a stock).
Usage example
We expect the underlying to grow. We write a put strike 90 (collecting the premium), buy a call strike 110. If the stock rises, the call will bring profit, the put will expire worthless. The entire structure can be for zero or a small debit/credit.
DTE
Varies, depending on the situation.
IV (implied volatility)
IV must be medium to high so that the premium allows you to write a put option more OTM, thus reducing the risk of assignment and at the same time allowing you to buy a call option with a higher delta, or open a position on credit
Premium
It can be zero-cost, or a small credit/debit depending on the strike option on both sides.
Margin
Yes, the broker requires a margin lock on the written put option.
Notes
Suitable for speculation on growth (long risk reversal) or decline (reverse risk reversal). For protection of shares (hedging), the strategy is called Collar (buy put + write call + hold shares).
Tags
risk reversal, option strategy, put write, call purchase, zero-cost collar, speculation, growth option
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