Creating synthetic long exposure before a catalyst
Advanced trader, comfortable with undefined risk
$60,000
Maximize upside exposure to GOOGL ahead of earnings
GOOGL reports earnings in 3 weeks. IV has spiked to 38% - above GOOGL's typical 25-32% range. For context: GOOGL's IV usually sits around 28% in quiet periods, jumps to 35-45% before earnings, and can spike to 50%+ during market stress. At 38%, put premiums are elevated (good for sellers), but call premiums are also elevated (bad for buyers). The skew is favorable though: the put Alex wants to sell is priced at 42% IV while the call is at 36% IV - this "volatility skew" means he's selling expensive and buying cheap.
Alex is extremely bullish on GOOGL's AI narrative but doesn't want to tie up $18,250 (30% of his portfolio) buying shares. The risk reversal lets him get similar upside exposure for almost no upfront cost. His max risk: being assigned 100 shares at $175 ($17,500) - which is 29% of his portfolio and within his limits.
Opens The Greeks Report and selects "Risk Reversal" from the strategy filter
Looks for trades where the put premium roughly equals the call cost (net credit or small debit)
Finds GOOGL May $175 put for $5.20 credit vs. May $190 call for $4.85 debit
Net credit: $0.35 per share ($35 for the contract) - he gets PAID to take a bullish position
The put strike is 4.1% below current price, the call strike is 4.1% above - symmetric risk/reward
Alex checks his broker to verify. GOOGL ticked up $0.80 - the put is now $4.90 and the call is $5.20. Net debit of $0.30 instead of credit. "Still nearly free exposure," he confirms.
Why this trade: For $30 debit (0.02% of his account), Alex gets 0.58 delta exposure - equivalent to owning 58 shares of GOOGL ($10,585 worth). If GOOGL rallies past $190, he has unlimited upside. If it drops below $175, he owns 100 shares at $175 - a 4% discount to today's price.
Short: $175 Put (0.28 delta) / Long: $190 Call (0.30 delta)
May 9th (31 DTE)
$0.30 net debit ($4.90 received - $5.20 paid)
1
Unlimited above $190
$17,530 (if GOOGL goes to $0 - theoretical)
$190.30 for call profit / $174.70 for put assignment
$17,500 (cash to buy shares if put assigned)
48%
Position on. Net delta of +0.58 means this acts like owning 58 shares. Theta is +$2.80/day because the 28-delta put decays faster than the 30-delta call (closer to ATM).
Stock dropped $4.30. Put gained $1.90 (bad), call lost $1.80 (bad). Alex is down $280 but not panicking - his $175 put strike is still $3.20 OTM and earnings are 2 weeks out. Worst case: he buys GOOGL at $175.
Pre-earnings run-up! Stock rallied $8.60 from the low. Call gained $3.00, put collapsed $4.20. Net delta still ~0.60. Alex is now solidly profitable.
GOOGL beat on AI cloud revenue and popped 4.5%. Call exploded from $6.40 to $9.80 (+$3.40). Put crushed to $0.45 as IV collapsed 12 points post-earnings (from 38% to 26%). Alex's thesis paid off.
Small pullback after earnings pop. Call dropped $2.90 but put is nearly worthless. Alex decides to close and lock in profits.
Day 26
Bought put for $0.25, Sold call for $6.90, Net: +$6.65 credit
+$635 (opened for $0.30 debit, closed for $6.65 credit)
3.6% on $17,500 capital at risk in 26 days (51% annualized)
Why exit here: Alex's thesis played out. He turned a $30 investment into $635 profit - a 2,117% return on actual cash deployed. On capital at risk ($17,500), it's 3.6%. He takes the win and moves on.
Risk reversals are conviction trades - only use them when you have a strong directional view
Net delta tells you your effective exposure: 0.58 delta = 58 shares of stock movement per $1
IV skew matters: Alex sold 42% IV put and bought 36% IV call - the skew worked in his favor
Post-earnings IV crush helped both legs - the put collapsed faster than the call
Know your assignment risk: $17,500 to buy 100 shares at $175 was within Alex's 30% position limit
Always verify prices - Alex's trade flipped from $35 credit to $30 debit in under an hour