What is delta risk reversals?

<p id="isPasted">A "delta risk reversal" can refer to two concepts: a specific options trading strategy, and a market quote that measures the implied volatility difference between two options with the same absolute delta. As a strategy, it involves taking a position in an out-of-the-money (OTM) call and OTM put to express a directional view, often with the goal of a net premium and limited cost. As a market quote, it is the difference in implied volatility between an OTM call and an OTM put with a specific, same delta, revealing the market's skew.</p><p>Delta Risk Reversal as a Trading Strategy</p><p>What it is:</p><p>A combination of one long and one short out-of-the-money (OTM) option, either a long call and a short put (a long risk reversal), or a short call and a long put (a short risk reversal).&nbsp;</p><p>Objective:</p><p>To establish a bullish or bearish view with a limited initial cost, potentially capturing a net premium and using options leverage. For example, a bullish investor might buy a call and sell a put.&nbsp;</p><p>Delta Hedging:</p><p>This strategy often involves delta hedging the position by trading the underlying asset to keep it neutral to price movements, though this can also be the result of the combined deltas of the call and put.&nbsp;</p><p>Delta Risk Reversal as a Market Quote</p><p>What it is:</p><p>A measure of the difference in implied volatility between two OTM options with the same delta, but opposite directions (e.g., the 25-delta call and the 25-delta put).&nbsp;</p><p>Purpose:</p><p>To quantify the implied volatility skew of the market.&nbsp;</p><p>Interpretation:</p><p>Positive Risk Reversal: The implied volatility of the call option is higher than that of the put, indicating a market expectation for large upward moves and smaller downward moves.&nbsp;</p><p>Negative Risk Reversal: The implied volatility of the put option is higher than that of the call, suggesting a market view of large downside potential and smaller upside moves.&nbsp;</p>