Those looking to add exposure on this pullback, but who are worried about additional downside may want to consider the opportunities of an asymmetric risk-reward position using options.
Over the few trading sessions, many of the best performing stocks of 2025 have had significant pullbacks – through Wednesday’s close NVIDIA (NVDA) was down more than 5% from the high it reached earlier this month, while Meta (META) was down more than 7% from its high intraday on Thursday. Other high-flying names have fallen even further, like Palantir (PLTR), which is down has experienced a peak-to-trough decline of more than 20%. The sell-off has left investors with a bit of a conundrum – this is the most significant pullback we’ve seen in most of these names since April, offering a potentially attractive buying opportunity. On the other hand, the S&P 500 is only down about 1.5% from its all-time high and even with this pullback, NVDA is still up roughly 30% year-to-date, while PLTR is up more than 100%.
Investors who are looking to add exposure on this pullback, but who are worried about the potential for additional downside may want to consider the opportunities of an asymmetric risk-reward position using options.
Asymmetric risk-reward in this context means that long-dated call options on these stocks are expensive relative to put options at the same expiration. This allows us to buy the stock, purchase a put for downside protection, and finance the put premium by selling a call that is further out of the money, providing us with upside (from the current price of the stock to the strike of the call option) that is in some cases more than five times the potential downside (from the current price of the underlying stock to the strike of the put option).
You may be wondering “Why do I need to use options?” I could just buy the stock and set a stop at the put strike and not have my upside capped by selling a call.” That is certainly an option. However, what the put option affords you is the freedom to let the stock decline below the put strike (and hopefully recover) without worrying about having to realize that loss. Should the stock experience a large decline, it also affords you the opportunity to own it at a significant discount to its current price. For example, if you entered into the first NVDA position on our list and the stock subsequently declined to $150, you could sell your put, collect $20 (assuming a sale price at the intrinsic value of the option - $170 minus $150) and own the stock with a cost basis of around $155.
Earlier this year, we published an article titled “Buffered ETFs… The Good, The Bad, and The Ugly” which highlighted some of the issues with buffered ETFs, most notably the fees associated with these products and their tendency to underperform the market. Using asymmetric options positions, you can construct a “buffered” portfolio with defined upside and downside. But, by using asymmetric options you avoid the fees of buffered ETFs and, while most buffered ETFs have a reward-to-risk ratio around 1:1, asymmetric option plays often offer R-Rs of 2:1 or better.
All the stocks on our list have technical attribute ratings of four or higher, and most offer a risk-to-reward ratios of two or higher with at least 10% potential upside.
These are just a few examples of stocks with options that have asymmetric payoffs, there are other names out there that offer similar risk-to-reward profiles, they can typically be found in stocks that attract a lot of speculative option investment, like PLTR & NVDA. Also, these are not the only expirations and strikes at which these stocks may offer asymmetric opportunities. If you conclude the downside risk is too great, you may be able to find a better fit by raising the put strike and lowering the call strike. As a general rule though, as the expirations of the options get closer to the present and the strikes get closer to being in the money, the reward-to-risk profile tends to deteriorate.
The type of asymmetric opportunities we've highlighted here are not ideal for filling out an entire equity allocation. There simply aren't that many of them out there and, due to the capped upside, they are likely to underperform in a strong bull market. However, they can be quite useful for taking targeted positions. As mentioned above, they can also be used to create a “buffered” portfolio instead of relying on off-the-shelf products that have less attractive risk-to-reward ratios. They are also a way that you can differentiate yourself as they add a level of sophistication to your client's portfolio that many of your competitors don't offer.
