This would allow us to buy a call that was closer to at-the-money, although we'd also be short an out-of-the-money call, meaning that our participation in any rally would eventually end. Or it would allow us to sell a put that was farther from at-the-money, meaning that the underlying stock would have to drop further before we had it put to us.

This would be a call spread risk reversal. A call spread risk reversal replaces the long call with a long call vertical spread, which results in a finite amount of potential profit if the underlying stock were to rally.

Our downside risk is still limited only by the fact that the underlying stock couldn't fall below zero. Figure If we were to sell the 70 strike put at 0. The greater the demand for an options contract, the greater its price and hence the greater its implied volatility.

A positive risk reversal means the implied volatility of calls is greater than the implied volatility of similar puts, which implies a 'positively' skewed distribution of expected spot returns. This is composed of a relatively large number of small down moves along with the possibility of few but relatively large up moves. From Wikipedia, the free encyclopedia. This article may be too technical for most readers to understand.

Please help improve it to make it understandable to non-experts , without removing the technical details.

January Learn how and when to remove this template message. Derivatives market. Derivative finance.

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