If there’s a stock that you think will go up and you are more than happy to buy it at a lower price, this is the strategy for you.
A risk-reversal is an option position that consists of being short (selling) an out of the money put and being long (i.e. buying) an out of the money call, both with the same maturity.
A risk reversal is a position which simulates profit and loss behavior of owning an underlying security; therefore it is sometimes called a synthetic long. This is an investment strategy that amounts to both buying and selling out-of-money options simultaneously. In this strategy, the investor will first make a market hunch; if that hunch is bullish he will want to go long. However, instead of going long on the stock, he will buy an out of the money call option, and simultaneously sell an out of the money put option. Presumably he will use the money from the sale of the put option to purchase the call option. Then as the stock goes up in price, the call option will be worth more, and the put option will be worth less.
Examples:
SELL JAN20'23 160 BIDU
BUY JAN20'23 200 BIDU
What does it mean?
Bidu has been beaten down so much. I think Bidu wiill go back up to 200 by the expiration date. However, if it doesn’t, I am willing to buy it at 160. When put this trade on, I actually collected a $4.34 premium. Meaning I will NOT lose any money unless BIDU is lower than 160-4.34 by Jan 2023.