# OptionsChain — Options Analysis (OA) Risk Reversal Guide
▶ Video VSkew (0:48) · HSkew (1:00) · all videos
**RR25** and **BF25** are two standard, delta‑based measures traders use to describe the *shape* of an option volatility smile. They tell you **directional skew** (RR25) and **curvature** (BF25). It measures skew, meaning the market's directional bias. Negative (typical in equities) means puts cost more than equidistant calls, so there's demand for downside protection. A move toward zero, or a sign flip, signals shifting sentiment: for example, call-chasing in a melt-up, or fear being priced in. In short, ATM vol tells you how much the market expects to move, while RR and BF tell you which way it leans and how fat the tails are. --- ## 🧭 Core definitions (trader‑standard) ### **1. 25‑Delta Risk Reversal (RR25)** RR25 compares the implied volatility of a **25‑delta call** to a **25‑delta put** of the same expiry: RR25 = IV25DeltaCall - IV25DeltaPut - In **equity index options**, RR25 is typically **negative**, because 25Δ puts trade at higher IV than 25Δ calls (downside crash protection demand). [greekslab.com](https://greekslab.com/blog/what-is-volatility-skew-and-how-to-use-it-in-0dte-spx-trading) - In **FX options**, the same definition is used, though conventions vary slightly by delta definition. [quantpie.co.uk](https://www.quantpie.co.uk/fx/fx_rr_str.php) **Interpretation:** - **RR25 < 0** → downside skew (puts richer). - **RR25 > 0** → upside skew (calls richer; common in some commodities/FX pairs). RR25 is the *slope* of the smile. This is a classic "back of the envelope" measure of directional bias in the market. **In SOAP2:** the delta is configurable (General Settings → Skew, "VSkew target delta"). If the strikes SOAP2 has can't reach that delta on one of the wings, it first requests extra far-out strikes for the calculation (never drawn), and if that still isn't enough it uses the nearest delta both wings can reach and relabels the row (for example `RR27*`, with a tooltip explaining why) rather than showing a 25-delta figure that isn't one. See the [HSkew/VSkew guide](./Guide/SOAP2%20HSkew%20VSkew.md). --- ### **2. 25‑Delta Butterfly (BF25)** BF25 measures the **curvature** of the smile relative to ATM: BF25 ≈ 0.5 × (IV_25Δ_call + IV_25Δ_put) − IV_ATM It measures curvature (kurtosis), meaning how much the market pays for the wings versus the center. A higher BF means the market is pricing fatter tails (bigger jumps in either direction) than a plain lognormal model would imply. - A **higher BF25** means more curvature (a more pronounced “smile”). [greekslab.com](https://greekslab.com/blog/what-is-volatility-skew-and-how-to-use-it-in-0dte-spx-trading) - In FX conventions, this is called the **25‑delta strangle** or **smile strangle**, defined identically: SS_{25\Delta} = \frac{IV_{25\Delta\text{ call}} + IV_{25\Delta\text{ put}}}{2} - IV_{ATM} [quantpie.co.uk](https://www.quantpie.co.uk/fx/fx_rr_str.php) BF25 is the *convexity* of the smile. --- ## 🧩 How RR25 and BF25 describe the smile | Measure | What it captures | What a high/low value means | |--------|------------------|-----------------------------| | **RR25** | Slope (directional skew) | Negative → downside fear (puts expensive). Positive → upside fear (calls expensive). | | **BF25** | Curvature (smile shape) | High → wings expensive vs ATM. Low → flatter smile. | Together, they fully describe the *first two moments* of the smile around ATM. --- ## 🧠 Why these measures matter ### **In equities (SPX, STOXX, etc.)** - RR25 is usually **negative** because markets price crash risk asymmetrically. - BF25 increases when **tail hedging demand** rises or when **vol-of-vol** increases. Standardized by delta, so they're comparable across time, strikes, and underlyings, even as spot moves. Sentiment and positioning gauge: RR shows which direction hedgers are paying up for, and BF shows how much tail risk is priced. Relative value: extremes versus history can suggest cheap or rich wings and skew (for example, buying puts when skew is historically flat). Risk management: they show how a portfolio's P&L will react to skew or wing repricing, which a single ATM vol can't capture. Event pricing: RR and BF often move ahead of earnings, elections, or central bank decisions. ### **Origin In FX** - RR25 often reflects **macro directional bias** (e.g., USDJPY risk‑on vs risk‑off). - BF25 reflects **uncertainty** or **event risk** (e.g., central bank decisions). The 25Δ RR and BF are the market-standard quoting convention in FX options, so they carry over as a common language into other asset classes. --- ## 📌 Practical intuition ### **RR25 (slope)** Think of RR25 as: > “Which wing is more expensive?” - If **puts are expensive**, RR25 < 0. - If **calls are expensive**, RR25 > 0. ### **BF25 (curvature)** Think of BF25 as: > “How much more expensive are wings vs ATM?” - High BF25 → both wings expensive (fat tails). - Low BF25 → flatter smile (less tail pricing). --- ## 🧪 Example (qualitative) Suppose for a given expiry: - ATM IV = 20% - 25Δ call IV = 19% - 25Δ put IV = 24% Then: - **RR25 = 19% − 24% = −5%** → strong downside skew - **BF25 = 0.5×(19%+24%) − 20% = 1.5%** → moderate curvature This is a typical equity‑index pattern. --- ## If you want, I can also compute RR25/BF25 from your own option chain Just give me: - underlying price - expiry - IVs or quotes for ATM, 25Δ call, 25Δ put (or the raw chain and I’ll extract deltas). --- ## Skew charts (vertical + horizontal) SOAP2 displays skew to help you see how implied volatility varies: - **Vertical skew**: IV vs strike (at a fixed expiry) - **Horizontal skew**: IV across expiries or sampled strikes (depending on view) These charts are meant as “shape” tools: - quickly spot rich/cheap wings - identify smile vs skew - compare call-side vs put-side skew behavior --- Go back to the main help page: [SOAP2 Help Guide](./index.md.html) ⬅ Back