Risk Reversal

Risk reversal is a strategic financial approach used mainly in trading and investing, where an individual or company uses options to protect against potential losses or to lock in profits. It often involves buying a put option (to limit downside risk) and selling a call option (to generate income), creating a balanced position. This technique helps manage uncertainty and provides a form of insurance, ensuring that significant losses are minimized while still allowing for potential gains. Essentially, risk reversal hedges against adverse price movements, aligning risk exposure with strategic financial objectives.