Long Risk Reversal

Overview

Pattern evolution:

When to use: When you are bullish on the market and uncertain about volatility. Normally this position is initiated as a follow-up to another strategy. Its risk/reward is the same as a LONG FUTURES except that there is a flat area of little or no gain/loss.

Profit characteristics: Profit increases as market rises above the long call strike price. Profit at expiration is open-ended and is based on the exercise price of B +/– price received or paid to initiate position.

Loss characteristics: Loss increases as market falls below the short put. Loss at expiration is open-ended and is based on the exercise price of A +/– premium received or paid to initiate position.

Decay characteristics: Time decay characteristics vary according to the relationship of the call strike price, put strike price and the underlying futures price at the time the position is established. The position is time decay neutral (not affected) if the futures price is exactly mid-way between the call and put strike prices; long time decay (benefits from time decay) when the futures price is closer to the call than the put strike price and short time decay (time decay erodes the value of the position) when the futures price is closer to the put than the call strike price.

CATEGORY: Directional
Long call B, short put A