Reversal
The mirror of the conversion: short shares, short put, long call at the same strike.
Arbitrage3 legsCredit
Illustrative: underlying at 100, strikes every 2.5, 45 days to expiry, implied volatility 25%, model prices. One lot = 100 shares.
Key figures
| Opens for | a credit of $9,945 |
|---|---|
| Locked result at expiry | −$55 |
| Position delta today | about zero |
| Outlook | Arbitrage |
The legs
| Action | Quantity | Option | Model price |
|---|---|---|---|
| Sell short | 100 shares | Shares | 100.00 |
| Sell | 1 | 100 put, 45 days | 3.22 |
| Buy | 1 | 100 call, 45 days | 3.77 |
How it works
The mirror of the conversion: short shares, short put, long call at the same strike. These structures lock in a result at the start. Their value is tied to interest rates and to small mispricings, so financing and trading costs decide whether they are worth doing.
When it fits
It suits a desk that sees option prices out of line with the shares and interest rates. The result is fixed at the start, so the edge is small and costs matter.
What can go wrong
The result is fixed at the start, so price moves do not change it. The risks are early assignment on the short options, dividends, and financing and trading costs, which can cancel a small locked gain.
Building it in Trident
In the Strategy Lab, choose reversal and the days to expiry. Trident applies these strike rules to your live chain, prices each leg and draws the trade on the risk graph, where you can drag the days to expiry, change implied volatility or switch on the crash band. When it looks right, send it to order management; nothing reaches your broker until you send it.
Frequently asked questions
What is a reversal?
The mirror of the conversion: short shares, short put, long call at the same strike.
What is the maximum loss on a reversal?
The result is locked at the start, so there is no market loss at expiry beyond costs and financing.
Where does a reversal break even?
With the underlying at 100 in this illustrative example, the break-even at expiry is none in the range shown.
Can I build a reversal in Trident?
Yes. Pick it in the Strategy Lab and Trident chooses the strikes from your live chain, prices the legs and draws it on the risk graph.
Illustrative example with model prices, not a recommendation. Options carry risk of loss. See the risk disclosure.