Questions / Quant trading, Option pricing models
Reading the smile
One-month implied vols: 25-delta put 24%, at-the-money 21%, 25-delta call 20%. What is the 25-delta risk reversal (call minus put), in vol points?
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Answer: -4 vol points
- Risk reversal = call vol − put vol.
- 20 − 24 = −4.
Interview shortcut. RR = σ(25Δ call) − σ(25Δ put).
Takeaway. A negative risk reversal means downside protection is bid.
In the app this has a follow-up where one thing about the setup changes. Try the follow-up.