Worksheet:

Follow Along
Section 5: Risk Reversal Combination

AristaNet- ANET on August 15, 2017. I think the stock will trend
higher so I want to put on a long risk reversal out until
December. I will structure this trade by selling 1 of the DEC 165
Puts and I will collect $11.35 in premium. Simultaneously I will
be buying 1 DEC 175 Calls and I will pay $12.75. This will be a Net
Debit because I am overall paying for this structure. This stock is
in an uptrend. The PNL starts as we put on the trade. What do
you notice? The PNL is tracking the stock's movement, it's
simulating being long in stock. As the stock goes down the
structure is worth less and as the stock is going up the structure
is worth more. That is how it is simulating being long stock.
 Risk Reversal Combination
Sell: 1 ANET
Expiration: DEC
Strike Price: 165 Put

Option Price: 11.35

Buy: 1 ANET
Expiration: DEC

Strike Price: 175 Call 

Option Price: 12.75

Max Loss If Net (Put Strike - Net Premium) X 100

Credit
Formulas

Max Loss If Net (Put Strike + Net Premium) X 100

Debit
Breakeven If Net Stock must close above:
Credit Put Strike - Net Credit
Breakeven If Net Stock must close above:
Debit Call Strike + Net Debit
Calculate the Formulas

Max Loss

Max Gain

Breakeven

ANET Price
at Expiry

Net Result