Risk Reversal Question

[destriero]

@earth_imperator is the dumbest mofo alive... and he's competing with soy and LF.

You can't just base the strikes equidistant from cash, you need to price the synthetic (MSFT forward) to the term you're trading. MSFT is trading 273 out to May so price your strikes accordingly. skewcorr is index-dependent.

IOW, you would capture more skew (larger credit) if the trade were d-neutral here.

 

[weij]

Earth imperitor is a moron. He priced the trade like a week after you did. The stock rallied 20 dollars.

the risk is that while the stock sells off before expiry you will have greater mtm risk than just your premium. Overtime you will earn this back in the form of theta.

risk reversals are a tool. They can be useful to express a delta view with a skew kicker if the situation warrants but generally I would rather just be long the stock.

If stock sells off, his short put would make him buy stock at the low price, which is what he expected ("put to you at 235"). Basically his original thought is fine, only missed that his loss can be higher than that, as I pointed out in my previous reply