Risk Reversal (RR)

Risk Reversal (RR) is the difference in implied volatility between a call option and a put option with the same delta, typically 25 delta. It indicates the skewness of the implied volatility distribution.

Calculation Method

1. Obtain Market Data:

   • Implied volatilities of out-of-the-money (OTM) call and put options with the same delta (usually 25 delta).

2. Calculate Risk Reversal:

   • Risk Reversal is calculated as the difference between the implied volatilities of the call and the put options.

   • Formula: $\text{RR} = \sigma_{\text{call}} - \sigma_{\text{put}}$

   • Where:

     • $\sigma_{\text{call}}$ is the implied volatility of the out-of-the-money (OTM) call option.

     • $\sigma_{\text{put}}$ is the implied volatility of the out-of-the-money (OTM) put option.