The Risk Reversal Strategy is an advanced strategy. This means that you will probably take some time in mastering it properly. However, considering the profits that can be generated from it, the effort is worth the pay-out. The most important part of this strategy is that it generates profits at almost no risk to the trader.

Starting Out

The first step in using the Risk Reversal strategy is to identify an asset that you wish to trade in. But most important thing is to identify the strong trends in that asset. That is, you will have to decide whether the asset is showing a tendency to go higher in price or fall. This will lead to the primary and the secondary trade options.

Working Principle

Let us consider identifying an asset which you expect to fall in price. The usual case here would be to buy a PUT option on the asset. This means you would be investing some money in the asset, in order to bet that it would fall in price. In case this does happen, you earn a substantial amount in profit. However, it is important to note that in this case, there does exist some amount of risk that the trade might not go the way you intend it to. The solution is the Risk Reversal Strategy.

Here, you would need to buy an “out of the money” Put option while simultaneously selling an “out of the money” Call option.

What makes this so special?

Both the trades must be based on the same asset, same timeframe and the same amount invested. What this does is that you earn a premium on the amount that you invest without incurring any cost of operation. Not only that, the risk involved is minimized as well. This is because the money that you will need to invest in the Put option (which is your primary trade) is covered by the amount you earn from selling the Call option.

The Risk

Of course, there is a risk involved in all this. For minimizing the risk, you need to ensure that the pay-out for the trade you select to be primary is higher than that you select to be secondary. After all, the main objective is to minimize the loss you may incur in case everything goes wrong.

Let us consider a case where the pay-out for the primary trade that we have selected is at x%. That is, in case we win the trade, we earn x dollars amount for each $100 invested. Let the rebate be set at a minimal percentage; say 5%.

For the secondary trade, let us consider that we have at least y% of pay-out with the highest rebate rate of 25%. This means even in case the secondary trade closes out of the money, you earn 25% of your investment back.

Now, in case the amount displays a totally reverse role to what we predicted, you still earn $100+ $y from the secondary trade. You lose the primary trade, ensuring that you get a $5 refunded. This means even with the trade lost, you do not lose the whole amount you invested. In fact, it is usually much less than 50% amount that you lose.

Of course, in case your prediction of the primary trade actually comes true, you earn a much higher amount of money.

Benefits

Besides the fact that it lets you minimize the risk associated with a trade, another important thing that you get by trading with risk reversal is that the profits are practically unlimited. However, all this comes at a little more effort. You will first off, need to be more experienced in executing this with certainty. Not only that, most traders do not offer the feature needed to allow risk reversal strategy on the basic membership.

Confirming with trader

The most important part of executing the example as we saw above is that your broker should allow the FULL SELL option. That is, it should allow you to sell back the Call contract back. That is the only way to ensure that you create an “in the money” win without investing any of your own funds. Most brokers either allow this only with a higher membership plan or with a higher investment slab. Confirm with your broker that they allow for this before signing up.

Combining the Risk Reversal Strategy

The best part about the risk reversal strategy is that you can combine it with a host of other binary trades in the background. This means you can employ the risk reversal strategy for hedging your own trades. However, as mentioned before, this would still need an experienced trader to identify the proper trades to work on. Although the loss is minimized compared to a traditional direct binary options trade, this does not mean that the risk reversal strategy can be carried on indefinitely. Moreover, a strong trend has to end at some point as well, so a trader will have to identify that point as well to stop the trades. Keep in mind that since you will be covering both sides of the stock price movement, you will always have an indication of the direction of the price.

Be Judicious

At the end of the day, a Binary options trade is still associated with a risk. You would need to be experienced enough to handle the risk reversal strategy to come out with a definite profit at the end of the trades. Never get too greedy and invest money that you cannot bear to lose. Even the best traders experience losses, and you should be prepared for the same. Of course, the upper limit that you can lose in a Binary options trade is limited by the amount you invest, so our advice would be to invest keeping all other factors in mind.

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