The risk reversal binary options strategy is basically a digital options and binary options trading technique aimed at reversing the risks required with options trading. It is viewed as as a hedging strategy, but seems to be more an arbitrage since it consists of both purchasing and selling out of money options at the same time without paying added costs.
This digital options trading strategy can bring in earnings without adding costs. It may, however, be a tad complex and may involve some learning curve from new traders. It may take time to become comfortable with the risk reversal strategy, but the time commitment will be worthwhile.
To illustrate how this digital options strategy functions, assume that the underlying asset that has been selected is bullish. Normally, the trader would go long on this asset. Unfortunately, this would demand a capital expenditure. Rather than going long on this underlying asset, the risk reversal digital options strategy can be used without taking on additional cost but having the identical effect as setting up a long position in the chosen asset and taking advantage of the possibility of a bull run taking place in the market.
In order for this strategy to work, the binary options trader will need to sell an out of money put option on the underlying asset while at the same time buying an out of money call option on this same exact underlying asset. The expense of buying the call option is offset by the amount received in selling the put option.
The purchasing of the call option will have the identical effect of going long on the asset, as it will bring in profits when the bull begins to run as expected. The move in fact mimics the long position in the underlying asset. In theory, as the price begins to rise, the call option grows in value while the put option becomes worth nothing. This is an excellent method of making profit without taking on costs.
Those who have established positions in any underlying asset can use this digital options strategy to hedge these positions without taking on extra costs. The greatest part is the earnings potential is limitless. These are essentially the reasons why the risk reversal strategy is a favorite among traders apart from the simple fact that it can be utilized on any underlying asset.
The risk reversal strategy can be used independent of any current position with the underlying asset. The strategy can be utilized for leveraged trading. Simply purchase a call option and at the same time sell a put option as in the earlier example if the sentiment is bullish on a specific asset or purchase a put option and sell a call option should the sentiment be bearish.
The only possible problem with this binary options strategy would be that some brokers require the trader to be on a higher tier before being able to use the risk reversal strategy. Check with your binary options broker to see if you need to be placed on a higher account level in order to make use of the risk reversal strategy.