Published on: 2026-08-13
Updated on: 2026-08-13
A risk reversal strategy in forex combines a long option with a short option on the same currency pair and expiry. In the FX options market, risk reversal also refers to the implied-volatility difference between comparable call and put options. The commonly followed 25-delta risk reversal measures this difference at the 25-delta points of the volatility surface, showing whether the call or put side carries the higher implied-volatility price.
A bullish risk reversal typically buys an out-of-the-money call and sells an out-of-the-money put, while the bearish version reverses the two legs.
The 25-delta risk reversal compares the implied volatility of corresponding 25-delta call and put options with the same maturity and is a common measure of FX volatility skew.
Under a call-IV-minus-put-IV convention, a positive reading means call volatility is higher, while a negative reading means put volatility is higher.
Risk reversals show which side of the currency move is more expensive in volatility terms. They can reflect hedging demand as well as directional views, so they are not standalone forex signals.
A bullish risk reversal involves buying an out-of-the-money call and selling an out-of-the-money put. The long call gains value from a sufficiently large rise in the currency pair, while the short put creates exposure if the pair falls below its strike. A bearish risk reversal reverses those positions by buying the put and selling the call.
Selling one option can offset part or all of the premium paid for the other, depending on the strikes, maturity and market pricing. It also adds risk from the short option, so a risk reversal should not automatically be treated as a low-cost version of buying an option.
In professional FX options markets, the same term has another use. Instead of referring to the position itself, a risk reversal quote compares the implied volatility attached to corresponding call and put options. The Bank of England describes FX risk reversals as quoted volatility differences between the two sides.
The distinction is simple:
Risk reversal strategy: the call-and-put position.
25-delta risk reversal: the implied-volatility comparison between corresponding options.
Delta measures an option’s sensitivity to changes in the underlying exchange rate and is also widely used in FX options markets to identify points on the volatility surface. The Bank of England notes that currency options are commonly presented in delta terms rather than only by strike price.
A 25-delta risk reversal compares corresponding call and put options with the same maturity. Using the call implied volatility minus put implied volatility convention:
25-delta risk reversal = 25-delta call IV - 25-delta put IV
Suppose one-month GBP/USD options have:
25-delta call IV: 8.8%
25-delta put IV: 9.6%
The risk reversal is:
8.8% - 9.6% = -0.8 volatility points
The put carries higher implied volatility than the call.
FX quotation conventions can differ. Some sources reverse the calculation or present the currency pair from a different orientation. The ECB has published risk-reversal analysis using a different presentation from the call-minus-put convention used here. The formula behind a dataset therefore needs to be established before interpreting its positive or negative sign.
The 25-delta risk reversal is a measure of FX volatility skew, rather than another name for the entire volatility skew. The broader skew describes how implied volatility changes across the option surface. The risk reversal summarises part of that shape by comparing corresponding call and put wings. The Bank of England’s technical framework states that at-the-money volatility sets the level of the smile while the risk reversal captures its skew.
Under the call-minus-put convention used here:
Positive risk reversal: call IV is higher than put IV.
Negative risk reversal: put IV is higher than call IV.
Near zero: call and put implied volatilities are relatively similar.
Suppose GBP/USD’s risk reversal drops from +0.3 to -1.2 volatility points. Put volatility has become substantially higher relative to call volatility.
That does not automatically translate into a bearish GBP/USD forecast. Investors already exposed to sterling may pay more for puts to protect existing positions. A negative reading can therefore reflect demand for insurance as well as outright bearish positioning.
Risk reversals move when calls and puts are repriced by different amounts. Common catalysts include:
Monetary-policy decisions: expected rate changes or policy surprises can increase demand for protection in one direction.
Economic releases: inflation, employment and growth data can change the perceived range of possible currency outcomes.
Political and event risk: binary or unusually uncertain events can make protection on one side more expensive.
Positioning: heavily concentrated market exposure can increase demand for options that protect against an adverse move.
Portfolio hedging: institutions may buy options to reduce currency risk on existing assets rather than to make a new directional trade.
A simple GBP/USD example shows how the repricing can appear before a major spot move.
Assume GBP/USD remains close to the same level over several sessions. One-month 25-delta call IV stays near 8.5%, while put IV rises from 8.6% to 10.0% ahead of an important policy event.
The call-minus-put risk reversal moves from -0.1 to -1.5 volatility points.
Spot has barely changed. The options market, however, is charging considerably more volatility for the put side than it was several sessions earlier.
The value of the 25-delta risk reversal becomes clearer when it is separated from spot price and the broader level of implied volatility.
Measure |
Main information |
What to look for |
Spot rate |
Current exchange rate |
Direction and price movement |
ATM implied volatility |
General option-implied volatility level for a chosen maturity |
Rising or falling volatility pricing |
25-delta risk reversal |
Relative IV of corresponding call and put wings |
Which side carries higher volatility |
A currency pair can therefore remain relatively stable while its risk reversal changes sharply. That combination shows that the current exchange rate has moved little even though call and put volatility pricing has become less balanced.
The maturity also changes the information being observed. FX implied volatilities form a term structure across different expiries, so short-dated and longer-dated options can react differently to market developments. A sharp change in a one-week risk reversal with little movement in a three-month risk reversal can indicate that the repricing is concentrated around the near-term period.
A risk-reversal number becomes more useful when it is compared rather than read in isolation.
Confirm the quotation convention. Establish whether the series uses call IV minus put IV or the opposite calculation.
Read the sign and size. Identify which option wing carries the higher implied volatility and the size of the difference.
Compare the reading with its recent range. A small negative number that has remained stable carries different information from a sudden move to an extreme level.
Compare it with spot. A large skew move while spot barely changes can reveal option repricing that is not visible on the currency chart.
Compare it with ATM implied volatility. This separates a broad rise in option volatility from a repricing concentrated more heavily on one side.
Check different maturities. Short and longer expiries can show whether the change is concentrated around a particular period.
Link the move to the catalyst. Policy decisions, data releases, positioning and hedging flows can explain why one side has become more expensive.
The useful information is the change in relative pricing, particularly when the move is large compared with the risk reversal’s own recent history.
A 25-delta risk reversal should not be treated as a standalone directional signal. A negative reading can reflect demand for downside protection rather than a fresh bearish position, while option prices also incorporate positioning and risk premiums.
A 25-delta risk reversal compares the implied volatility of a 25-delta call with a corresponding 25-delta put of the same maturity. It is commonly used to measure part of the volatility skew in FX options.
Under a call-IV-minus-put-IV convention, a negative risk reversal means put implied volatility is higher than call implied volatility. It can indicate stronger demand for downside protection, although it does not guarantee the currency pair will fall.
A positive reading means call implied volatility is higher than put implied volatility under the same convention. Calls are therefore carrying the higher relative volatility price.
It can refer to both. The risk reversal strategy combines a long option with a short option, while the FX risk reversal quote compares implied volatility between comparable calls and puts.
The main use of the 25-delta risk reversal is to identify which side of an FX move has become more expensive in implied-volatility terms. Its value increases when the reading moves far from its recent range or diverges from spot and at-the-money volatility.
For practical market analysis, the number works best as a comparison tool. Track how it changes, compare short and longer maturities, and connect unusual repricing with the event or positioning behind it. The risk reversal then adds a view of FX option pricing that a spot chart alone cannot provide.
