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

By Joseph Adinolfi

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

The stock-market carnage unleashed by President Trump's tariff plans has sent trading volume in the options market soaring to record highs.

As major equity indexes have moved lower, investors have favored contracts that would protect their portfolios from further losses.

But this increasingly lopsided demand for bearish put contracts has created an opportunity for investors looking to make a big contrarian bet, according to Rocky Fishman, founder of Asym 500: Anybody who expects stocks to return to record highs over the next few months could hit a huge payoff using a strategy known as a ratio risk reversal.

Such a strategy would involve selling one put, or one call, and using the proceeds to buy multiple calls, or multiple puts.

Fishman pointed out that, as of Monday, investors could finance the cost of five bullish call contracts tied to the S&P 500 SPX with a strike price of 6,000 for every sold put with a strike price of 4,000. Given that stocks moved lower on Tuesday, the strike prices that would allow an investor to put on such a trade with little or no upfront costs have likely moved lower as well, Fishman noted.

"There are a number of ways tariffs could end up much milder than currently intended, whether through negotiations, discretionary backtracking, or judiciary action. Valuations are far less demanding than they were prior to the selloff (though equities are not cheap)," Fishman said in written commentary.

A put option gives the holder the right, but not the obligation, to sell a stock or index at an agreed-upon price, known as the strike price. A bullish call gives the holder the right, but not the obligation, to buy. Calls tend to pay off when stocks climb above the contract's strike price before the expiration date.

If the market does rebound, the payoff from this strategy would depend on how far the S&P 500 moves above the strike price on the calls. But if the market rises back near the record highs seen in February, investors could reap a sizable windfall.

Massive declines in stocks over the past week have caused the Cboe Volatility Index VIX, better known as Wall Street's "fear gauge," to soar. The index finished Friday above 53, its highest closing level since the beginning of the pandemic.

The higher VIX reflects elevated demand for options. The index is priced based on trading activity in contracts tied to the S&P 500 that are set to expire over the next month or so.

Data from Cboe Global Markets, a major U.S. options-exchange operator, showed that more than 100 million contracts tied to U.S. stocks, ETFs and indexes changed hands on Friday - a record for a single session. Demand for puts was especially elevated.

U.S. stocks finished sharply lower on Tuesday, with the S&P 500 falling 1.6% after erasing huge gains from earlier in the session. The Nasdaq Composite COMP fell by 2.2%, while the Dow Jones Industrial Average DJIA shed more than 320 points, or 0.8%.

-Joseph Adinolfi

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April 08, 2025 17:23 ET (21:23 GMT)

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