Deciphering Risk reversal data

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In the FX Trading Station 2.0 News software’s “Signals & Technical Levels”, there is section entitled “Risk Reversals” under the options tab. Below is further information regarding risk reversals, to compliment your analysis of their role in the currency markets.

The risk reversal feature may assist traders in gauging market sentiment. They are defined as the difference in volatility between similar out of the money (25 delta) call and put options. The risk reversal is derived by subtracting the volatility of the call from the volatility of the put. A bias in the direction of one over the other may show which direction dealers expect the price to break.

Instead of quoting these options' prices, dealers quote their volatility. A positive risk reversal means the volatility of calls is greater than the volatility of similar puts, which implies that more market participants are betting on a rise in the currency than on a drop, and vice versa if the risk reversal is negative.

A sample line of the news plug-in appears below.

[[10:55 GMT July 27] | 1M R/R | 3M R/R | 6M R/R | 1YR R/R |
- - - - - - - - - - - - -|- - - - - -|- - - - - -|- - - - - -|- - - - - - | - -
[USD/JPY] [112.62] | 0.3/0.5 JC | 0.6/0.9 JC | 0.8/1.1 JC | 0.9/1.2 JC


The above visual is an example of the risk reversal for the USD/JPY pair and implies Yen bias to the upside (at the time of this example). The top line lists the time frame, by intervals of 1, 3, 6, and 12 months. Beneath each time the directional bias of the volatility is stated. The volatility under the 1 month risk reversal (0.3/.05 ) implies an upside bias in the direction of the Yen (at the time of this example).

The last two letters reference the currency and the options type, (in this case a Japanese Yen Call). The difference between the two numbers is the spread of the option. Overall this risk reversal implies, as indicated by options volatility, that the Yen has an upwards bias over multiple time frames (at the time of this sample). A notation of 0.1/0.1 AR would indicate the options volatility is not showing any directional bias for the time period indicated.

Definitions & Abbreviations

R/R = Risk Reversal
A/R = Average Risk

EP = Euro Put
EC = Euro Call

JC = Yen Call
JP = Yen Put

CC = Swiss Call
CP = Swiss Put

SC = Sterling Call
SP = Sterling Put