A 25-delta risk reversal (25Δ RR) compares the implied volatility of an out-of-the-money 25-delta call with that of an out-of-the-money 25-delta put for the same currency pair and expiration. A common convention is 25Δ RR = 25Δ call implied volatility − 25Δ put implied volatility. The result measures one slice of the option market’s volatility skew: it shows which side of the currency’s option market is priced richer, after matching the two options by delta.
For example, suppose a one-month EUR/USD 25-delta call is quoted at 8.20% implied volatility and the matching 25-delta put at 7.50%. Under the call-minus-put convention, the risk reversal is +0.70 volatility points. That indicates the EUR call side is priced at a higher implied volatility than the EUR put side for that expiry. It can reflect relative demand for upside exposure or protection, but it is not by itself a forecast that EUR/USD will rise.
Delta describes how an option’s theoretical value responds to a small move in its underlying exchange rate, under a chosen pricing model and set of conventions. A 25-delta call and a 25-delta put are selected by their delta magnitude, usually around 0.25 in absolute terms. In a standard FX volatility smile, they are out-of-the-money options on opposite sides of the forward rate. They generally have different strike prices; the matching feature is delta, not strike.
Delta is not a universal probability label. It is a model-dependent sensitivity, and FX markets can use different conventions, including spot delta, forward delta, and premium-adjusted delta. Those choices can produce different strikes for what is labeled a 25-delta option. Before comparing two data screens, check that their delta conventions, pair orientation, expiry, and volatility quote source match.
The “risk reversal” name also describes a familiar option structure: buy an out-of-the-money call and sell an out-of-the-money put at the same absolute delta, or reverse those legs. The quoted risk reversal is usually the difference in implied volatilities of those options. It is a volatility quote, not necessarily the net premium paid for an actual option trade. Actual premium depends on strike, forward, expiry, rates, notional, bid-ask spreads, and other pricing inputs.
Keep the two implied-volatility observations aligned by currency pair, expiry, valuation time, and delta convention. Then subtract:
25Δ RR (call-minus-put) = 25Δ call IV − 25Δ put IV
| 25Δ call IV | 25Δ put IV | Call-minus-put RR | What the sign says |
|---|---|---|---|
| 8.20% | 7.50% | +0.70 volatility points | The call side is richer |
| 7.50% | 8.20% | −0.70 volatility points | The put side is richer |
| 7.50% | 7.50% | 0.00 volatility points | The two sampled wings have equal IV |
“Volatility points” matter here. A change from 7.50% to 8.20% is a difference of 0.70 percentage points, not a 0.70% change in the option premium. If a data vendor uses put-minus-call, the signs in the table reverse. CME’s FX Options Vol Converter explicitly labels its risk-reversal summary as call minus put and explains that the option refers to the base currency under its displayed pair convention. Other screens may use a different presentation, so verify the definition before interpreting a positive or negative number.
If puts on the base currency have higher implied volatility than comparable calls, the put wing is richer. For EUR/USD, a EUR put is a right to sell euros for dollars, so a richer put wing can be consistent with greater demand to hedge against euro weakness. A higher call volatility can point to richer pricing for euro upside exposure. These readings describe relative option pricing, not a known inventory of who is buying or selling, and not a guaranteed direction for spot.
At-the-money implied volatility gives a central reference for expected variability embedded in option prices. The risk reversal adds information about the difference between two wings. Two currency pairs can have the same at-the-money volatility but very different 25-delta risk reversals: the total level of priced volatility may be similar even though the relative price of upside and downside options differs.
A one-week risk reversal and a one-year risk reversal answer different questions. Short expiries can be more affected by a nearby central-bank decision, election, data release, or settlement flow. Longer expiries reflect a wider window of uncertainty. Compare the same tenor over time, or inspect the full term structure, rather than comparing a one-week quote with a three-month quote as if they were interchangeable.
A 25-delta measure is also only one point on each side of the volatility curve. CME notes that its traditional 25-delta method uses two points, while its broader skew methodology incorporates more option prices. If your question is about deep tail pricing, a 10-delta risk reversal may be more relevant, but those farther-out options can be less liquid and their quotes more sensitive to wider bid-ask spreads. For a broad description of the curve, compare the risk reversal with a butterfly or a full implied-volatility surface.
Before drawing a conclusion, record the currency pair as displayed, which currency is the base, the expiry, the valuation time, whether the quote is call-minus-put or put-minus-call, the delta convention, and whether the prices are bid, mid, ask, or indicative. Then read the number narrowly: it describes the relative implied volatility of two matched option wings. It can help compare option pricing and hedging conditions, but it cannot identify the cause of the skew, provide a complete volatility forecast, or guarantee where the exchange rate will move.
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