Risk Reversal

A risk reversal is a fundamental two-leg strategy that creates synthetic stock exposure using options while reducing capital requirements and modifying risk characteristics, making it essential for traders seeking leveraged directional exposure with enhanced capital efficiency. This sophisticated strategy involves buying an out-of-the-money call and selling an out-of-the-money put, creating a position that behaves similarly to owning the underlying stock but with different breakeven points, margin requirements, and risk profiles. The strategy is particularly effective when traders have strong bullish conviction but want to reduce the capital investment required for direct stock ownership while maintaining unlimited upside potential and accepting defined downside risk. Professional traders use risk reversals for portfolio construction, hedging applications, and as building blocks for more complex strategies that require synthetic exposure with specific risk-reward characteristics. The strategy offers flexibility in strike selection to customize the risk-reward profile according to individual risk tolerance and market outlook while providing exposure to directional price movements with reduced capital commitment. Risk reversals are widely used in institutional portfolio management for creating synthetic positions, currency hedging, and tactical asset allocation adjustments

If NIFTY is at ₹25,800, set up: Buy ₹26,200 Call for ₹60, Sell ₹25,400 Put for ₹45, creating ₹15 net debit with synthetic long exposure above ₹26,215 and unlimited upside potential while accepting assignment risk below ₹25,400 if NIFTY declines significantly.