Risk reversal (25-delta)
Definition · Level 5 · Greeks & volatility
Keep reading with Tradecraft
Without an account, you can read three definitions every 30 days. Tradecraft explains all 738 terms and strategies, with the lessons that teach them, flashcards that come back before you forget, quizzes and a payoff lab.
Long an OTM call and short an OTM put (or the reverse), typically at 25Δ. As a skew quote: the 25Δ call’s IV minus the 25Δ put’s, usually negative for equity indices; sign conventions vary, so traders also say which side is “over”.
Example
25Δ call 13, 25Δ put 21 → −8.
Rules and market figures change: check the current ones before relying on this.
Where Tradecraft teaches it
Level 5 · Greeks & volatility, in the lesson “Black–Scholes, skew & the vol surface”: The model’s inputs and blind spots, parity as a hard constraint, and how desks quote skew.
Related terms
- Black–ScholesEuropean option-pricing model using spot, strike, time, rates, dividends and volatility; assumes lognormal prices, constant vol, no jumps and…
- Butterfly (vol quote)Smile-curvature quote: average of the 25Δ call and 25Δ put IVs minus ATM IV — how rich the wings are relative to the money.
- Jump riskExposure to a sudden price gap (earnings, news, overnight) that can’t be hedged along the way — a key place real markets break the model.
- Lognormal assumptionModel premise that log-returns are normally distributed, so prices stay positive — but it badly understates how often large moves (fat tails) occur.
- Volatility skewImplied vol varying by strike. In equity indices, OTM puts trade above equally distant OTM calls (a downward “smirk”), driven by crash risk and…
- Volatility smileA U-shaped IV curve across strikes, with both OTM puts and OTM calls richer than at the money; common in FX pairs (often tilted to one side) and…