The risk reversal is one of those structures every options textbook covers and almost no retail trader uses. It is also the structure that shows up most often when institutions express directional bias cheaply.

Structure

Sell an OTM put. Buy an OTM call. Same expiry, often the same delta on each side (e.g., 25-delta put short, 25-delta call long). The credit from the put roughly finances the call. Net cost: near zero or a small credit.

Why the math works

Implied volatility skew makes OTM puts more expensive than equivalent OTM calls on most equity indices. Selling expensive skew and using the proceeds to buy cheap skew is a structural edge that survives most market regimes.

Risk profile

Replicates long stock exposure between the strikes. Above the call strike, you are uncapped to the upside. Below the put strike, you are functionally long stock - and have to take delivery or close at a loss. The downside is real.

Where institutions use it

Funds expressing long-only bias on a single name will often layer in risk reversals instead of buying calls outright. The structure delivers similar upside to a long call, with the put short funding the position. Reading risk reversals on the tape is reading institutional conviction.

Where retail should be careful

Cash-secured put requirement: brokers will want margin or cash to cover the short put.
Dividend assignment risk: short puts in the money can get assigned around ex-div dates.
Tail risk is uncapped: a 30% gap down through your put strike is a real loss that single-leg long calls do not have.

The honest take

Risk reversals are an institutional structure that scales down imperfectly to retail. The math is real, but the operational risk of the short put on small accounts often makes the strategy infeasible. Worth understanding even if you do not trade it - because reading the structure on the tape is informative.