Risk Reversal Calculator

Risk Reversal at a glance

How a risk reversal works

The risk reversal, also called a bullish risk reversal or simply a combo, pairs two out of the money options on opposite sides of the current price. The premium from the short put offsets most or all of the cost of the long call. In equity markets, out of the money puts typically trade at higher implied volatility than equally distant calls, so the put often brings in enough to cover the call or even leave a small credit. That makes the trade a way to sell skew while getting long the stock's upside.

At expiration the payoff has three zones. Between the put and call strikes, both options expire worthless and you keep the net credit or lose the net debit. Above the call strike, the long call gains one for one like owning shares. Below the put strike, the short put loses one for one, also like owning shares. The shape resembles synthetic long stock with a flat gap in the middle, and that gap is what you accept in exchange for moving both strikes away from the money.

Before expiration the position has a strong positive delta but relatively little gamma, theta, or vega, because the long call and short put partly offset each other on those Greeks. It does carry skew exposure: if put implied volatility rises relative to call volatility, usually during a selloff, the trade loses more than delta alone would suggest. In currency and futures markets, traders quote risk reversals as the volatility difference between equally out of the money calls and puts, which is why the name doubles as a skew measure.

Risk Reversal example with real numbers

With the stock at $100, implied volatility at 30%, a 4.1% risk free rate and no dividend, you would sell 1 95 put (32 days) at $1.43, buy 1 105 call (32 days) at $1.78. That is a net debit of $35. At expiration a maximum profit of unlimited and a maximum loss of $9,535, with a breakeven at $105.35. The lognormal chance of profit is 28%.

These are theoretical American option prices from the Bjerksund and Stensland model, not live quotes. Load any ticker in the risk reversal calculator above to run the same math on real market prices.

When to use a risk reversal

• You are bullish and want upside exposure for little or no upfront premium.
• You would be willing to buy the stock at the put strike if it falls.
• Put skew is steep, so out of the money puts are rich compared with calls.
• You want leveraged upside without the steady time decay of a long call alone.

Max profit, max loss and breakeven

Maximum profit

Unlimited. Above the call strike, profit equals the stock price minus the call strike plus net credit (or minus net debit), times 100, with no ceiling.

Maximum loss

Put strike minus net credit (or plus net debit), times 100, if the stock falls to zero. That is close to the risk of owning shares bought at the put strike, so size the trade with that in mind.

Breakeven

With a net debit, breakeven = call strike plus net debit. With a net credit, breakeven = put strike minus net credit, and you profit anywhere above it. At zero cost, you break even anywhere between the strikes.

Risk Reversal Greeks

• Delta: Delta is solidly positive, combining the long call delta with the positive delta of the short put, and it moves toward +100 as the stock travels beyond either strike.
• Gamma: Gamma is small near the middle because the long call's gamma offsets the short put's gamma, tilting positive near the call strike and negative near the put strike.
• Theta: Theta is close to flat at entry, since decay on the long call is offset by decay collected on the short put.
• Vega: Net vega is small, but the position is short put volatility and long call volatility, so a steepening of skew hurts.

See the live numbers for your position in the Greeks tab of the calculator, or explore a single option in the options Greeks calculator.

Early exercise and assignment risk

The short put in a risk reversal is the leg exposed to early assignment. If the stock falls well below the put strike, the put becomes deep in the money with little time value, and its holder may exercise early to collect the strike price and earn interest on the cash. You then buy 100 shares at the put strike while still holding an out of the money call. Make sure you have the cash or margin to take those shares, because a forced liquidation would sell them at the worst moment.

Dividends affect a risk reversal in two ways. The short put gains value heading into an ex dividend date, which makes early exercise of the put less likely before the payment and more likely after it. On the upside, if a rally pushes the long call deep into the money, you might exercise it before an ex dividend date to collect the dividend, but only when the dividend is larger than the call's remaining time value. Selling the call and buying shares reaches the same result while keeping any time value left in the call.

The calculator's Early exercise risk tab flags short legs that are likely to be assigned. For a single option, use the early exercise calculator or read how early exercise and assignment work.

Pros and cons

How to manage a risk reversal

• Pick the put strike at a price where you would be comfortable owning the shares.
• Buy back the short put if the stock breaks below support, leaving a long call with defined risk.
• Roll the call up and out after a strong rally to take profits while keeping some upside.
• Buy a lower strike put to cap the downside if you want defined risk on both sides.

Risk Reversal FAQ

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Educational tool, not financial advice. Calculations are theoretical and depend on your inputs; real fills, fees, early assignment and dividends can change results. Options involve risk and are not suitable for every investor.