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A risk reversal is a strategy that involves selling a put and buying a call with the same expiry month. This is also known as a bullish risk reversal. A bearish risk reversal would involve selling a call and buying a put. Today we’re going to examine the bullish risk reversal.
Stocks may be extended short-term and due for a pullback, but if a trader wanted to take a bullish position a risk reversal provides can be a good option.
The beauty of the trade is that you can own upside exposure and get paid if the stock goes nowhere. If the stock falls, you end up taking ownership for a price less than when the risk reversal was initiated.