Risk Reversal: Synthetic Directional Bet 2026
A risk reversal is a two-leg options strategy where you sell an OTM put and use the premium to buy an OTM call (or vice versa for a bearish view). The result is a leveraged directional bet that often costs little or nothing. It's how professional traders express a strong directional opinion without tying up significant capital.
What Is a Risk Reversal?
A risk reversal (also called a split synthetic or combo) involves selling an OTM put and buying an OTM call on the same stock with the same expiration. The premium from the short put finances most or all of the long call's cost, creating a near-zero-cost directional position.
The strategy behaves like a bullish bet with a twist: if the stock rallies, you profit from the long call (unlimited upside). If the stock drops, you're obligated to buy shares at the put strike (like a cash-secured put). If the stock stays flat, both options lose time value and you're roughly flat.
Risk reversals are widely used by institutional traders and hedge funds. They're also a useful indicator of market sentiment — when risk reversal pricing is skewed heavily toward calls, it signals bullish institutional demand.
Example: Stock XYZ is at $100. You sell the $90 put for $2.50 and buy the $110 call for $2.50. Net cost: $0. If XYZ rises to $130, the call is worth $20 and the put expires worthless — profit of $20/share ($2,000). If XYZ drops to $80, the call is worthless and the put costs $10 — loss of $10/share ($1,000). If XYZ stays between $90-$110, both options expire worthless and you break even.
When to Use It
- When you're strongly bullish (or bearish, using the reverse setup) on a stock
- When you want leveraged directional exposure with little or no upfront cost
- When you'd be happy buying the stock at the put strike anyway (assignment isn't a problem)
- When IV is high on puts relative to calls (put skew makes the short put worth more)
- As a replacement for buying stock when you want a defined entry price on the downside
How to Set It Up
1. For a bullish risk reversal: sell 1 OTM put (typically 20-30 delta, 5-10% below current price) 2. Buy 1 OTM call (typically 20-30 delta, 5-10% above current price) 3. Use the same expiration: 45-90 DTE gives the thesis time to develop 4. Aim for a net credit or zero cost by adjusting strike distances 5. For a bearish risk reversal: reverse the legs — buy OTM put, sell OTM call 6. Ensure you have margin or cash for potential put assignment 7. Manage the position: close the call for profit if the stock rallies, or accept assignment if it drops to your put strike
Risk & Reward
Max profit: Unlimited on the upside (long call). | Max loss: Put strike x 100 (stock drops to $0 and you're assigned). Practically, loss = put strike - $0 - net credit. In the example: $90 - $0 = $90/share ($9,000) in the extreme case. | Breakeven: Call strike + net debit paid (or - net credit received). For a zero-cost risk reversal: breakeven on the upside is the call strike ($110). On the downside, you break even between the put strike and current price if the stock stays flat.
Best Brokers for This Strategy
IBKR offers the best margin treatment for risk reversals and the tightest fills on two-leg orders. Tastytrade makes it easy to build risk reversals with its multi-leg order entry and provides clear risk analysis. thinkorswim/Schwab has excellent tools for analyzing put/call skew to identify favorable risk reversal pricing. See our IBKR review.
Not financial advice. Always do your own research.
Tastytrade is built for options traders — the best platform for covered calls, cash-secured puts, and spreads.
Open Tastytrade Account →