Risk Reversal

Often yes, due to put skew. But 'free' doesn't mean 'risk-free.' You have substantial downside risk if the stock falls. The call is financed by the put, but you're accepting stock ownership obligations at the put strike.

If the stock stays between strikes at expiration, both options expire worthless. You keep any net credit received or lose any net debit paid. This is the 'gap' zone with minimal P/L.

Similar but not identical. Both have unlimited upside and substantial downside. Key differences: Risk reversal has a 'gap' between strikes with minimal exposure, doesn't receive dividends, requires rolling, and can be entered for near-zero cash.

You need margin for the short option. For a bullish risk reversal, that's the short put - typically 15-25% of the stock value you'd be obligated to buy. Exact requirements vary by broker.

You must buy 1,000 shares at the put strike price. You should have the capital or margin available for this. After assignment, you own stock plus still have the long call (if not expired).

Equidistant for balanced exposure and usually near-zero cost. Aggressive (call closer) for higher delta and more upside participation, usually nets a credit. Conservative (put closer) for more downside protection, usually costs a debit.

Consider rolling at 14-21 DTE. Roll earlier if the stock approaches your put strike and you want to avoid assignment. Roll for credit if possible - the goal is to extend the position while offsetting any realized losses.

Often minimal impact. The long call decays (bad) but the short put also decays (good). These effects often offset, making risk reversals relatively theta-neutral compared to single-leg options.

Yes! Adding a bearish risk reversal (long put, short call) to a long stock position creates a collar. This limits your upside but protects your downside - a common hedging technique.

Possible reasons: skew steepened (put IV rose more than call IV), time decay if not balanced, or bid-ask spread on marking. Check the individual option values and compare to your entry prices.

To bet on skew flattening: bullish risk reversal (sell expensive puts, buy cheap calls). To bet on skew steepening: bearish risk reversal (buy expensive puts, sell cheap calls). Delta-hedge if you want pure skew exposure.

Risk reversals are often quoted using 25-delta options: the 25-delta put and 25-delta call. This standardizes the measure across different stocks and expirations. The 'risk reversal' price is the difference in IVs or premiums.

Calculate the net delta of the position. Offset with stock: if you have +60 delta from the risk reversal, short 60 shares. Adjust the hedge as delta changes. This creates a pure volatility/skew position.

Put skew typically steepens before earnings (demand for downside protection) and can flatten sharply after. You can use risk reversals to bet on this pattern - sell puts before earnings, buy them back after.

They're embedded in collars, equity-linked notes, and accumulator structures. The risk reversal market reflects the cost of protection and the price of skew. Institutional flows in these products affect option pricing significantly.