Concept
Risk Reversals
Risk Reversals are Breadth, Sentiment & External Data concepts. A reference entry: the Library explains it rather than implements it.
FX skew
What are risk reversals?
A risk reversal is two things. As a structure, it pairs an out-of-the-money call with an out-of-the-money put on the same underlying and expiry, one bought and one sold, creating directional exposure for little or no net premium. As a market quote, above all in FX, it is the implied volatility of the 25-delta call minus the 25-delta put for a given tenor, expressed in vol points.
That quote is the market's standard measure of skew. A positive 25-delta risk reversal means the market charges more for calls than for puts at matched deltas, implying demand for upside; a negative one means downside is the expensive side. Desks quote risk reversals alongside at-the-money vols and butterflies, and together the three define each tenor's volatility smile.
Because currency options trade mostly over the counter between banks, risk reversals offer a rare sentiment read on the world's largest market. Crypto has adopted the same convention, with 25-delta skew on BTC and ETH options read exactly the same way.
Why there's no indicator for this
A risk reversal is a property of the options market, not of spot. It requires the volatility surface: implied vols for 25-delta calls and puts by tenor, which in FX come from OTC interbank quotes aggregated and licensed by banks and data vendors. Nothing in a spot chart's price or volume encodes what options traders currently charge for calls versus puts, so no chart indicator can generate a genuine risk reversal series.
Price-only stand-ins, such as rolling realized-return skewness, describe the distribution the market already printed. The risk reversal is a forward-looking premium set by hedging demand, and the two routinely diverge, which is precisely what makes the quote informative.
How to read a risk reversal quote
A quote like 'EUR/USD 1-month 25-delta risk reversal at -0.6' compresses a lot into a few characters.
- 1Note the pair, tenor, and delta: 25-delta is the standard quote, while 10-delta versions describe deeper tail pricing.
- 2Read the sign as call vol minus put vol, so a negative number means puts trade over calls.
- 3Scale the level against that pair's own history; half a vol point is dramatic in some pairs and noise in others.
- 4Watch changes around events: fast repricing shows directional fear shifting even while spot sits still.
How traders use it
- As a per-pair sentiment gauge on FX desks, adding an options-market read to spot-based tools like a currency strength meter.
- For event risk: risk reversals around elections and central bank meetings reveal which outcome the market is paying to hedge.
- As a crowding check, with extreme skew read against futures positioning from COT analysis.
- By volatility traders trading skew itself, buying or selling risk reversals when the premium looks rich or cheap against realized asymmetry and prevailing implied volatility.
- As macro context: dollar-pair skews often reprice together when risk appetite turns, dovetailing with DXY correlation regimes.
Risk reversals vs other volatility reads
Implied Volatility: Implied volatility prices the overall level of options; the risk reversal isolates which side of the distribution that price loads onto.
VIX: The VIX compresses 30-day index option prices into one fear level; a risk reversal is pair-specific and directional, naming which tail is bid.
COT Analysis: COT reports show realized futures positioning with a reporting lag; risk reversals show what hedgers are paying for direction right now.
Concept family
Breadth, Sentiment & External Data
63 concepts mapped · 63 in the Library
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