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The Skinny On Options Math

Risk Reversals and Risk-Reversals

The Skinny On Options Math

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

In today's Skinny on Options Math, Jacob explains the term Risk Reversal, which actually applies to two different concepts that are equally as complicated.

The first type of Risk Reversal is buying an out of the money call and an out of the money put creating a synthetic stock for a pure directional position. This is the opposite of a vertical position where the space between the legs is completely flat. The main reason to use this type of position is create synthetic stock in non stock traded underlyings or to get involved in positions with low delta.

The other type of risk reversal is a mathematical statistic for understanding how volatility impacts movement away from a regular strike smile distribution. In basic terms, this is how you measure skew.

For all the hopeful options math majors out there, all the slides are available to follow along.

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