Want to bet on a stock-market rebound? Consider this options strategy.

Want to Bet on a Stock-Market Rebound? Consider This Options Strategy

One longtime options-market analyst says a strategy known as a ‘ratio risk reversal’ is looking attractively priced.

By Steven Orlowski, CFP, CNPR

As investors search for opportunities in a volatile market, some are turning to sophisticated options strategies that offer high reward potential without betting the farm. One such strategy—relatively obscure outside professional trading circles—is now catching attention: the ratio risk reversal.

According to one longtime options-market analyst, this strategy is not only well-suited to current conditions, it’s also attractively priced.

What Is a Ratio Risk Reversal?

At its core, a risk reversal is a bullish options strategy that involves selling a put and buying a call with the same expiration but different strike prices—typically out-of-the-money. The trader profits if the underlying stock or index rises significantly.

A ratio risk reversal takes this a step further: instead of buying one call for each put sold, the trader buys more calls than puts—usually in a 2:1 ratio. That increases the upside potential while still maintaining a degree of downside risk coverage.

“In essence, you’re financing a larger upside bet by taking on limited downside risk,” says the analyst, who has over two decades of experience analyzing options flows for institutional clients. “Right now, the pricing on these structures is unusually favorable, because volatility skew is compressed. That means calls are cheaper relative to puts than they typically are.”

Why Now?

With markets still digesting mixed economic signals—ranging from cooling inflation to soft patches in consumer data—investors are uncertain about whether we’re headed for a breakout or a breakdown. That’s where the ratio risk reversal may shine.

“Implied volatility on puts is still elevated due to downside hedging demand, while call premiums have been under pressure,” the analyst explains. “That sets up an attractive environment for bullish strategies that lean on the relatively cheap cost of calls.”

In practical terms, consider this hypothetical trade on the S&P 500 ETF (SPY):

• Sell one 3-month $430 put

• Buy two 3-month $470 calls

Assuming SPY is trading around $450, this structure might cost very little upfront—or even generate a small credit—depending on market conditions.

If SPY rises well above $470, the trader reaps outsized gains from the second call. If the market drifts sideways or slightly down, the trade could expire near break-even. The main risk is a sharp decline below $430, where the short put starts to lose money.

Who Is This Strategy For?

The ratio risk reversal isn’t for beginners. It carries downside exposure and involves managing asymmetric positions that can behave unpredictably in volatile markets.

However, for experienced investors with a directional bias—and a willingness to accept short-term risk—it can be a smart way to express a bullish view without tying up large amounts of capital.

“It’s not a set-it-and-forget-it trade,” the analyst cautions. “But in the right hands, and in this type of market, it’s a powerful way to bet on a rebound.”

Final Thoughts

With interest rates stabilizing and corporate earnings surprising to the upside, optimism about a potential market recovery is slowly building. For those looking to lean into a bullish outlook without chasing stocks outright, the ratio risk reversal might offer the right blend of leverage, risk management, and strategic flexibility.

As always, investors should do their own research—or consult with a financial professional—before diving into complex derivatives.