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Advanced Options · ADV-13b · Advanced

Bearish risk reversal

How does bearish risk reversal express a downside financed by an upside obligation view?

One concept per page · original written lesson · 540 prose words · authored, not installed or production-approved

What you will learn and prerequisites

Read first: Read a contract and its premium, Rights, obligations and expiration, Defined payoff risk is not margin, Read the whole multi-leg ticket

A bearish risk reversal buys a put and sells a higher call. It finances downside exposure with an uncovered upside risk. That is materially different from the limited loss of a long put.

Construction: read every leg

Buy 95 put and sell 105 call at equal premiums. Below 95 the put earns, between strikes gross P/L is zero and above 105 the short call loses without a finite upper limit.

Read the ticket before the graph

BUY means you own an option right; SELL means you accept a short-option obligation. Positive quantities are long and negative quantities are short in the calculation. Check quantity, call/put, strike, multiplier and expiry before netting premium.

All legs in this example share November 20, 2026 expiration. The entry observation is October 6, 2026, with fictional QLT at 100. These are independent illustrative premiums, not a current option chain or executable quotes. The terminal diagram assumes every leg and any shares are resolved at one common settlement price.

Before expiry: time and volatility

Both legs supply bearish Delta. Gamma and Vega depend on moneyness and skew. A squeeze can make the short call increasingly sensitive. Equal premium is not equal risk.

Manage the position deliberately

Compare a bear-put spread when a finite loss cap is required. Prepare for call assignment and stock delivery. A stop cannot guarantee a price through an upward gap.

Fictional teaching ticket · no order submission

Bearish risk reversal

QLT • reference spot $100 • independent illustrative prices • quote date 2026-10-06

Read action, quantity, type, strike, expiry, premium and multiplier before the payoff
ActionQtyTypeStrikeExpiryPremium/unitMultiplier
SELL1Call1052026-11-202100
BUY1Put952026-11-202100
Opening option cash (+received / −paid)0 USD
Entry option fees in cost variant1.3 USD
Shares included0
Joint-terminal results—not a guarantee of interim cash requirements
MeasureBefore costsAfter stated entry fees
Maximum terminal profit9,5009,498.7
Maximum terminal loss magnitudeUnbounded in this terminal modelUnbounded in this terminal model
Breakeven settlement price(s)95, 10594.987

Before-fee zero-P/L interval(s): [[95.0, 105.0]]. An endpoint labeled null denotes an unbounded interval.

This is a mathematical expiry experiment using the displayed legs, not an executable quote. The slider range is not a risk limit.

$0.65 per option contract on entry only. No exit, assignment, financing or tax costs modeled.

Independent fictional premiums, not one simultaneous arbitrage-consistent chain. All legs realized simultaneously at intrinsic at the same expiry; terminal calculations do not model American early exercise, temporary unhedged positions, forced liquidation or live liquidity. Displayed chart domain is not a tail-risk cap.

From opening cash to a settlement result

Read the opening instructions: sell 1 105 call at 2.00; buy 1 95 put at 2.00. Option opening cash is $0.00 received as a credit. A received credit is not earned profit while the obligation remains open.

Set the common settlement price to 120.00. Calls have intrinsic value max(S−K,0); puts have max(K−S,0). Subtract the opening premium from each intrinsic value, then multiply by signed quantity and the 100-unit multiplier. Shares contribute their price change from their own cost. The calculation popup shows every leg.

The combined result is $-1,500.00 before costs and $-1,501.30 after illustrative opening fees of $1.30. Exit fees, slippage, funding, dividends and taxes are not included. Opening fees are 0.65 per option contract, not a statement of any broker's pricing.

Maximum terminal profit is $9,500.00; maximum terminal loss magnitude is unbounded in this model, before costs. Isolated zero-P/L settlement points in the model: 95, 105; zero-P/L intervals are shown in the ticket data, not single isolated breakevens. Move the scenario slider across each strike and explain why the slope changes there. A strike is a contract threshold, not a prediction.

This terminal model is useful for comparing risk shapes, but actual American-style assignment, share delivery, forced liquidation or a failed multi-leg exit can produce a different path. A long protective leg is not an automatic instruction that a broker must exercise it when another leg is assigned.

Open the calculation without leaving this lesson

Calculate this exact ticket

Same-page calculation. Closing restores the lesson position and originating control.

P/L = Σ[q × multiplier × (intrinsic − opening premium)] + shares × (S−share entry) − costs

Intrinsic is nonnegative before the signed quantity is applied. This is a fictional terminal calculation.

  1. -1 × 100 × (15.00 − 2.00) = $-1,300.00: 105 call.
  2. +1 × 100 × (0.00 − 2.00) = $-200.00: 95 put.
  3. Opening fees: 1.30.
Before costs $-1,500.00; after entry fees only $-1,501.30.

Maximum risk and breakevens

Same-page calculation. Closing restores the lesson position and originating control.

Evaluate S=0, all strikes and the final tail slope; solve P/L=0 on each linear segment.

Same-expiry payoffs are piecewise linear. A finite chart range cannot prove a tail is bounded.

  1. Maximum terminal profit is $9,500.00; maximum terminal loss magnitude is unbounded in this model, before costs.
  2. Breakeven points: 95, 105; zero-P/L intervals are shown in the ticket data, not single isolated breakevens.
  3. Costs shift net P/L downward without moving the strikes.
Maximum terminal profit is $9,500.00; maximum terminal loss magnitude is unbounded in this model, before costs.

The whole ticket at common expiry

Vertical: P/L per complete ticket (USD)
Horizontal: Underlying settlement price (USD)

The whole ticket at common expirySolid combined curve is before fees; the second includes only the stated entry fees. Individual-leg lines explain construction. This is terminal intrinsic P/L, not current option value. Price can move outside the displayed range. The complete numerical data are available below.-1,771.42-1,063.11-354.803353.5031,061.811,770.12808896104112120
1. Combined terminal P/L before fees2. Combined terminal P/L after entry fees
Solid combined curve is before fees; the second includes only the stated entry fees. Individual-leg lines explain construction. This is terminal intrinsic P/L, not current option value. Price can move outside the displayed range.
See the individual legs behind the combined curveThe whole ticket at common expirySolid combined curve is before fees; the second includes only the stated entry fees. Individual-leg lines explain construction. This is terminal intrinsic P/L, not current option value. Price can move outside the displayed range. The complete numerical data are available below.-1,771.42-1,063.11-354.803353.5031,061.811,770.12808896104112120
1. Combined terminal P/L before fees2. Combined terminal P/L after entry fees3. Leg 1: SELL 1 105 call4. Leg 2: BUY 1 95 put
Read the graph as a data table
Complete graph data; original fictional observations or model calculations
Underlying settlement price (USD)Combined terminal P/L before feesCombined terminal P/L after entry feesLeg 1: SELL 1 105 callLeg 2: BUY 1 95 put
801,5001,498.72001,300
80.51,4501,448.72001,250
811,4001,398.72001,200
81.51,3501,348.72001,150
821,3001,298.72001,100
82.51,2501,248.72001,050
831,2001,198.72001,000
83.51,1501,148.7200950
841,1001,098.7200900
84.51,0501,048.7200850
851,000998.7200800
85.5950948.7200750
86900898.7200700
86.5850848.7200650
87800798.7200600
87.5750748.7200550
88700698.7200500
88.5650648.7200450
89600598.7200400
89.5550548.7200350
90500498.7200300
90.5450448.7200250
91400398.7200200
91.5350348.7200150
92300298.7200100
92.5250248.720050
93200198.72000
93.5150148.7200-50
9410098.7200-100
94.55048.7200-150
950-1.3200-200
95.50-1.3200-200
960-1.3200-200
96.50-1.3200-200
970-1.3200-200
97.50-1.3200-200
980-1.3200-200
98.50-1.3200-200
990-1.3200-200
99.50-1.3200-200
1000-1.3200-200
100.50-1.3200-200
1010-1.3200-200
101.50-1.3200-200
1020-1.3200-200
102.50-1.3200-200
1030-1.3200-200
103.50-1.3200-200
1040-1.3200-200
104.50-1.3200-200
1050-1.3200-200
105.5-50-51.3150-200
106-100-101.3100-200
106.5-150-151.350-200
107-200-201.30-200
107.5-250-251.3-50-200
108-300-301.3-100-200
108.5-350-351.3-150-200
109-400-401.3-200-200
109.5-450-451.3-250-200
110-500-501.3-300-200
110.5-550-551.3-350-200
111-600-601.3-400-200
111.5-650-651.3-450-200
112-700-701.3-500-200
112.5-750-751.3-550-200
113-800-801.3-600-200
113.5-850-851.3-650-200
114-900-901.3-700-200
114.5-950-951.3-750-200
115-1,000-1,001.3-800-200
115.5-1,050-1,051.3-850-200
116-1,100-1,101.3-900-200
116.5-1,150-1,151.3-950-200
117-1,200-1,201.3-1,000-200
117.5-1,250-1,251.3-1,050-200
118-1,300-1,301.3-1,100-200
118.5-1,350-1,351.3-1,150-200
119-1,400-1,401.3-1,200-200
119.5-1,450-1,451.3-1,250-200
120-1,500-1,501.3-1,300-200

The failure case

The stock rallies sharply. The put cannot offset the call's upside liability because their favorable regions lie on opposite sides.

Check your understanding

Try the question before revealing its answer. These are reading checks, not trading certification or a site completion record.

What is whole-position terminal P/L at QLT 120.00, before costs?

Reveal the worked answer

$-1,500.00

Use all signed legs, not just the winning leg. The popup and graph use the same ticket.

Critical risk question

Does a terminal loss bound guarantee every early-assignment or liquidation outcome?

Reveal the worked answer

No.

It describes the specified common-settlement payoff. Product rules, stock delivery, capital and execution still matter.

Takeaway

Explain the intended downside financed by an upside obligation exposure, each leg's obligation and the adverse price region before using the strategy name.

Sources, assumptions and downloadable script

External references support definitions and conventions. Worked scenarios and prose are original. No current quotes or dealer inventory are claimed.

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