Risk Reversal Strategy

It is not a secret that all options trading carry an inherent risk. The amount of risk presented in each individual trade depends on a number of factors, such as the volatility of the market and economic news that may affect an asset. When a trade, however, seems particularly risky, a trader can choose to utilize trading strategies, such as the Risk Reversal Trading Strategy, to control the outcome of the investment. Although Risk Reversal Strategy can limit risks involved in a binary options trade, it should also be noted that it cannot eliminate risk completely, and it could even place a limit on the trade’s profits.

Options trading strategies are especially popular in commodities options trading, and Risk Reversal is one of the advanced binary option strategies employed by professional traders who have a strong grasp on the movements and sentiments of the market. As such, the strategy should be used with caution by new traders, for its mastery requires a good amount of practice and experience. Risk Reversal is useful when the price of an asset shows constant fluctuation, leaving the trader uncertain of its sensitivity in the market. Having an idea on which way the price will go based on impending economic or political events, traders may wish to limit the risk of their trades and keep their options open in case the asset’s volatility takes an unexpected turn against them.

The Execution of the Strategy

Let’s look at an example of when and how to place a Risk Reversal to further clarify the specifics of this binary options strategy in the market. Let’s say a trader believes that a scheduled economic event (such as the release of the NFP) will affect an asset positively (the USD) driving its value up. Current volatility in currency markets, however, leaves the trader feeling less confident than usual about the actual outcome of the event, leading them to a risk minimizing approach for their trade. Thus, instead of placing only a “call” option on the trade, the trader also places a “put” option with the same expiry. Regardless of which way the market goes, the investor stands to profit from the return of at least one of the investments. As the expiry date draws nearer, however, and the final outcome of the event becomes clearer, the trader can choose to sell one of his options which is not doing well and use that money to buy another option in the opposite direction which appears to be doing better, thus increasing his profit margins without an actual further investment in the trade. As an example, assume that market signals indicate a positive impact of the NFP, as the investor had originally thought. The investor can now sell his out-of-money “put” option and use the money to buy another “call” option that he assumes will move in-the-money before the expiry date. Conversely, if the outcome looked pessimistic, the investor could sell his “call” option and buy another “put” option to reverse the risk and remain in the money.