Buying the Dip with the Custom Scan - Long Risk Reversal on Good Oversold Companies

Most traders buy the dip using long calls or naked puts. But with our Custom Strategy Scanner, you can take a more advanced approach: sell a put and buy a call to build a long risk reversal. This setup gives you low-cost upside on oversold, fundamentally strong stocks,  and our scanner makes it easy to find and fine-tune these trades.

Key Takeaways

• A risk reversal involves selling a lower put and buying a higher call, often for a small net debit or even a credit.
• It works best on good companies that are oversold or near support, where the downside risk is limited and a bounce is likely.
• Compared to a naked put, it adds upside optionality. Compared to a long call, it lets you finance the call purchase with a short put.
• Use the Custom Strategy Scanner to target these setups based on delta, RSI, fundamentals, and option liquidity.

Two Common Ways to Buy the Dip: Long Call and Naked Put

When a strong stock pulls back, there are two popular strategies traders use to play the rebound: the long call and the naked put. Each has its strengths, but also some trade-offs to be aware of.

The Long Call

This is the simplest bullish play. You buy a call option, typically out-of-the-money, to benefit from a potential rebound in the stock. Your P&L would normally look like this:

Here are three reasons why long calls are popular among traders:

• They offer unlimited upside
• They are simple to understand
• If the underlying price is above the strike price at expiration, they can exercise the option and buy the underlying asset at a lower price

But there are trade-offs:

• The premium can be expensive, especially on volatile stocks
• The breakeven point can be far from the current price
• If the stock trades sideways or rebounds slowly, time decay can eat away the premium

What we are saying is that, basically, a long call works best when you expect a sharp upward move in a short time frame (which is never an easy prediction to make).

The Naked Put

In this case, you sell a put option below the current price, hoping the stock either stays flat or rises. The P&L of your naked put will have this shape:

Once again, we see at least three reasons why traders like naked puts:

• If you choose your strike price wisely, this can be a trade with a high probability of profit
• You get paid upfront (collect premium)
• Since there’s just one leg involved in the strategy, this is a fairly easy trade to execute

Of course, there’s a clear trade-off here:

• If the stock really starts moving up, you will miss out on the rally due to your capped profit potential (the long call buyer would probably be happier in this case)
• If the stock falls hard, you're exposed to losses (just like owning the stock, but with a leverage)

This approach is often used on stocks you wouldn’t mind owning at a lower price: if the underlying price is below the strike price, your put is in-the-money. This means that you may end up getting assigned shares. This should not be the end of the world for you: you should be ready to own shares if things go wrong, meaning you should have a bullish outlook for the longer term on the underlying asset.

This being said, you can actually merge these two approaches, as we explain in the next section.

What Is a Long Risk Reversal?

The classic long risk reversal looks like this:

• Sell 1 lower put
• Buy 1 higher call

This creates the following P&L profile:

As you can see, the P&L of a long risk reversal has three elements:

• A flat-to-slightly-profitable zone above the put strike (sometimes, this area is slightly negative, other times it is positive: you can play around with your options to change its shape)
• Unlimited upside if the stock rallies (this is what was missing from your naked put strategy)
• Downside risk if the stock falls below the put strike, equivalent to being assigned the stock at that level (this is the risk associated to selling a put, as you saw in the naked put section above)

How Does the Long Risk Reversal Strategy Compare to Selling a Put and Buying a Call?

We have presented three strategies to you. Now, let’s compare them:

An Example of the Long Risk Reversal Strategy

Let’s say you’re looking at a high-quality growth company that just pulled back sharply on broad market weakness. The fundamentals are solid, but the RSI is under 30, and it’s trading near a major support zone.

This is where it could make sense to go for a long risk reversal strategy:

• You sell a lower strike put just below support, and collect premium
• You use that premium to buy a higher call,  giving you the right to ride the rebound
• If the stock stays flat or rises, you benefit
• If it drops below the put strike, you're assigned a stock you like, at a lower price compared to the one you saw when you opened the strategy

For instance, this description may fit the current case of Edison International (EIX), currently trading at $49.20. Therefore, you may choose to:

• Sell a $50 put expiring in a month
• Buy a $52.5 call with the same expiration date

This setup starts with the short put being in-the-money, which is a valid variation if you're comfortable taking on more delta and want a wider profit zone. Alternatively, you can keep both legs out-of-the-money for a more conservative setup.

Your P&L would look like this:

If EIX remained at the current price at expiration, you would earn $115. In fact, you need EIX to remain above $48.05 to make money. Notice that there’s a horizontal plateau between $50 and $52.5, where you would earn $195. If the stock price really starts moving up (above $52.5), you will see your profit increase in a linear manner.

So, as you can see, the $50-$52.5 zone will resemble the naked put ideal profit zone, and you’re keeping the possibility of earning even more in a long-call-style upward move.

Note that this strategy works best on stocks without an upcoming dividend. If the underlying pays a dividend before expiration, early assignment on the short put or reduced call value could affect the trade’s risk/reward.

How to Build This in the Scanner

You can find trades like these using our Custom Strategy Scanner:

1. Start a New Scan
2. Choose “Custom” as the strategy type
3. Add two legs:
4. • Sell 1 Put 
   • Buy 1 Call 

Then apply any filter you’d like to use. For instance, here is a list of some popular ones:

• RSI (14): Below 30 (a typical oversold condition)
• Stock Score Fundamental / Growth: Above 5 (this ensures quality tickers)
• Average Volume: Any (or filter >1M for liquidity)
• Total Option Volume: Above 5,000
• Bid-Ask Spread: Under $1
• Bid-Ask Spread %: Below 10%
• Days to Expiration: 20 to 45
• Leg #1 Delta (Put): Above –20
• Leg #2 Delta (Call): 25 to 40
• … and more!

Alternatively, you can also try the predefined scan we have created for this specific case (good and oversold companies). You will find the link at the bottom of the text.

Read More

• The custom scan guide (Custom Options Strategy Screener)
• Our predefined scan for this strategy (Long Risk Reversal on Good Oversold Companies)
• Our blog article on the long call strategy (Gaining a Better Understanding of the Long Call Options Strategy)
• Our blog article on the short put strategy (Short Put Explained [Theory, Example, and Things to Know])
• Try the strategy in our options screener