Risk-Reversal Options Strategy

The Risk-Reversal Premium

AuthorsBlair Hull; Euan Sinclair

Paper linkhttps://papers.ssrn.com/sol3/papers.cfm?abstract_id=3968542

The strategy trades SPY options with ~25-day maturity by buying 15-delta calls, selling 15-delta puts, and shorting 30 SPY shares. Positions are rebalanced when net delta falls below 20 or rises above 40, and closed five days before expiration.

Risk-reversal mispricing occurs because OTM puts are overvalued relative to calls, driven by high downward-hedging demand and limited selling. Selling OTM puts captures this premium, amplified by the positive correlation between volatility and the underlying price.