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Risk Reversals

Currency Options	Option Pricing	Option Types


Overview	Overview	Overview
Definitions	Delta	Call/Put Options
Trading and Hedging	Gamma	Knock Outs
Intrinsic Value	Theta	Knock Ins
Extrinsic Value	Risk Reversals	Average Rate
Where to trade	Vega	Basket Options
Where to hedge

Risk reversals refer to the difference in pricing for a Put and a Call for a 25 Delta option. Supply and demand in the options market often means that these Puts and Calls, which theoretically should trade at the same volatility level, have differing prices.

The name 'Risk Reversal' comes from the fact that traders actually make markets in the price difference between the 25 Delta puts and calls. The affect of buying or selling the risk reversal is to change the your risk to being:

Long Calls / Short Puts or Long Puts / Short Calls

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