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Compare equally sensitive put and call wings16 min read
25-Delta Risk Reversal and Volatility Skew Explained
Learn how 25-delta put and call prices or implied volatilities measure skew, why quote signs differ, how strikes are selected, and what the metric cannot predict.
Prepared by Mark · Primary sources below
Direct answer
A 25-delta risk reversal compares an out-of-the-money put near minus 0.25 delta with an out-of-the-money call near plus 0.25 delta for the same underlying and expiration. It may be stated as a price difference or an implied-volatility difference. One equity convention is put minus call, so a positive value indicates richer downside protection; other markets quote call minus put, reversing the sign. The formula, delta convention, timestamp, and maturity must therefore accompany every number. The metric describes relative option pricing, not the probability or forecast of a market decline.
Delta chooses comparable wings, not identical strikes
The 25-delta put and call usually have different strikes around the forward level. Their strikes move as spot, time, rates, dividends, volatility, and the delta model change.
Delta is a local sensitivity and only an approximation sometimes used as a probability proxy. A 25-delta option is not guaranteed to expire in the money 25 percent of the time.
Price and volatility versions answer different questions
OIC describes a price measure such as 25-delta put price minus 25-delta call price. Dollar prices include strike locations, forward level, multiplier, and discounting.
An IV measure compares the volatilities backed out from those prices. It removes some price scale but remains model-, quote-, and convention-dependent.
Sign convention must be written explicitly
If RR equals put IV minus call IV, a positive five volatility points means the put wing is five points richer. If the desk defines call minus put, the identical surface prints negative five.
Never label a series simply risk reversal and compare it with another vendor before checking orientation, absolute versus signed put delta, premium adjustment, and interpolation.
A higher reading reflects demand and tail pricing
Rising put-over-call skew can accompany stronger demand for downside protection, reduced call demand, supply changes, or stress. It can also shift without the underlying subsequently falling.
Asset classes differ: equity indices often show downside skew, while commodities or currencies may exhibit call skew or change sign as physical and macro risks evolve.
Use the metric with a complete observation record
Store underlying, expiration or tenor, forward, exact delta definition, put and call strikes, bid-mid-ask choice, IV model, formula orientation, and timestamp.
Compare a consistent historical series and inspect liquidity. Stale wing quotes, wide spreads, discrete strikes, event premiums, and interpolation can produce a noisy or non-tradable signal.
Common questions
What does a positive 25-delta risk reversal mean?
Only after defining the formula: under put minus call, it means the put wing is priced or vol-marked higher than the call wing.
Are the 25-delta put and call at the same strike?
No. They normally use different strikes selected to have delta magnitudes near 0.25 for one expiration.
Is 25-delta skew the same as the price of a risk reversal?
Not always. Skew often refers to an IV difference, while the risk-reversal price can mean the dollar premium difference.
Does high put skew predict a crash?
No. It records relative market pricing and demand; hedging flows, supply, events, and liquidity can change it without forecasting direction.
Sources and further reading
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