Risk Reversal or Synthetic Long Stock Position

A "Risk Reversal" or Synthetic Long position is where an investor will simultaneously buy and sell, out-of-the-money options with the goal of simulating a long stock position.  However, the goal of the synthetic position is to obtain much higher leverage, and reduce the down side risk.  After hearing the folks at fast money talk endlessly about this position, I decided to create a document so people can study it and think Quantitatively about it.  The full article is at: 

http://www.quantprinciple.com/invest/index.php/docs/quant_strategies/riskreversal/

Here is the Abstract:

Abstract

This article discusses a form of Financial Derivative investment strategy called a ‘Risk Reversal.’ A ‘Risk Reversal’ is also referred to as a ‘Synthetic Long’ in some literature. The article explains the theory, and shows you what risks you are exposed to. It also shows you how to protect your investment once the market has moved in a favorable direction. The theory, the mathematics and a theoretical example are presented. If you would like to contact the author, send a message to . If there are any errors, typos, or defects with this article please make the effort to contact the author.

Once you have read the article please discuss below (good or bad!).

  

Chicago Quant Meetup Group Started

The Chicago area now has a Quant Meetup group.
http://www.meetup.com/ChicagoQuants

This group will meet to study and understand Quantitative topics in financial engineering. Typically this group will be working through a chapter each month from a well known book in quantitative finance. However, this group is by no means an academic only group. Some of the group members will form organizations to try out the strategies studied in the real world (By actually pooling capital together and forming an investment club or joint venture). Topics that will be discussed: Volatility, Delta Neutral Hedging, Leverage, Risk Arbitrage, Statistical Arbitrage, Strangles, Straddles, Barrier Options, and other strategies.

ALL levels of quantitative financial engineer or investor wishing to understand will be welcome.

ALL members should be willing to chip in a few bucks each month to help defer the cost of a meeting place, and printing of some handouts, plus coffee.

ALL Members are expected to do some reading and preparation before each meeting.

There is NO NEED to have a Ph.D. some knowledge of Calculus is helpful, but almost all of the concepts can be picked up and understood with just an inquisitive mind. That said, Ph.D.s are more than welcome.

About the meetings, we will meet 1 or 2 times per month depending on needs. The meeting will be about 2 hours long, 50 minutes of a presentation, followed by open discussion/questions, and finally a social period over some coffee.