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 Risk-Reversal : A First Attempt
Issued on April 01 2011 par Strategies-options.com
This is one of the most flexible strategies using options..
It's obvious that a long call or a long put shows how asymmetrical risks and payoffs are.
I - Spot position substitution using options. A long call struck at K with maturity T and interest rate r plus a short put struck at K with maturity T is the same as if one took a long position on the forward at the price K A short call struck at K with maturity T and interest rate r plus a long put struck at K with maturity T is the same as if one took a short position on the forward at the price K. Graphs A long 1 year 100 call 1/ short 1 year 100 put. At time t  Across time  The little loss correponds to the cost of carry of that forward contract. A long 1 year 40 call 1/ short 1 year 40 put. Same payoffs. II - Go ahead with that principle . Why don't we take a look at those positions, this time with the same maturity but different strikes. A long 1 year 110 call 1/ short 1 year 90 put :   It looks like as if it was a future contract most of the time. As the maturity vanishes, the gap between risk reversals and future becomes wider. Next : Risk-Reversal Previous : Strangle Download the pricer here BASIC OPTIONS STRATEGIES - INDEX BASIC OPTIONS STRATEGIES - CHAPTER I BASIC OPTIONS STRATEGIES - CHAPTER II BASIC OPTIONS STRATEGIES - CHAPTER III BASIC OPTIONS STRATEGIES - CHAPTER IV Strategies-options.com |
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