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Difficulty: Medium
Category: Options & Greeks
Practice quant interview questions from top firms including Jane Street, Citadel, Two Sigma, DE Shaw, and other leading quantitative finance companies.
Topics: options, risk-reversal, payoff-profile, trading-strategy
You're a trader assessing different options strategies. A client is considering a risk reversal on a stock currently trading at 100 dollars. They plan to buy a call option with a strike price of 105 dollars for 2 dollars and sell a put option with a strike price of 95 dollars for 1 dollar. Assume both options have the same expiration date. What is the approximate payoff profile of this risk reversal strategy at expiration, and under what market condition is this strategy typically employed?
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