The 25-Delta Risk Reversal: Putting a Number on Volatility Skew

Picking strikes by delta, not by dollars

A risk reversal is built from two options on the same expiration: an OTM put and an OTM call, each selected by delta rather than by a fixed dollar distance from the stock price. The standard convention is the 25-delta wing — the put with a delta near −0.25 and the call with a delta near +0.25 (a 10-delta version exists too, for a read further out in the tail). Delta is the natural yardstick here because it already bakes in moneyness and the prevailing volatility level, so a "25-delta put" means roughly the same thing — a similar rough probability of finishing in the money — whether the stock's IV is 15% or 60%. A fixed $5-strike distance wouldn't give you that.

The formula is just a subtraction: RR25 = IV(25Δ put) − IV(25Δ call), usually quoted in volatility points. Strikes are discrete, so an exact 25-delta strike rarely exists on a real chain — in practice traders either interpolate between the two nearest strikes or just use whichever one lands closest.

Reading the sign

A positive RR25 is ordinary equity skew — the put carries the richer IV, which is the default state for most single stocks and nearly every broad index most of the time. Index products tend to run a persistently steep positive RR because index puts are the standard institutional hedge against a market-wide drawdown, and that hedging demand keeps bidding them up relative to the calls.

A risk reversal near zero, or negative, flips the read: the call is the richer side. That shows up around heavily shorted names mid-squeeze, active takeover targets, and other situations where the tail everyone's pricing runs to the upside instead of the downside — the market is effectively saying a violent gap up is at least as plausible as a violent gap down, sometimes more so.

Why the steepness changes which side is priced rich

The size of the risk reversal isn't just a curiosity — it changes which side of the chain is comparatively expensive. When RR25 is steep and positive, OTM put premium is elevated relative to what a flat-vol curve would imply, which is exactly why cash-secured puts and put credit spreads collect more premium per unit of modeled risk in that environment than they would if skew were flat. The flip side of the same coin is that OTM calls are comparatively cheap when skew is steep. As RR25 compresses toward zero, that asymmetry between the two sides narrows, and if it goes negative, it can reverse outright — the calls become the rich side instead.

None of this makes a steep skew "free money" for a put seller. It's compensation for a real, well-documented tendency of stocks to fall faster than they rise — the same crash asymmetry that explains skew's existence in the first place.

Skew has a term structure too

RR25 on next week's expiration doesn't have to match RR25 three months out. Short-dated skew often steepens sharply heading into a binary event — earnings, an FDA date, a rate decision — as near-term downside protection gets bid up specifically for that date. Longer-dated skew tends to move more slowly and reflects structural crash-hedging demand rather than any single catalyst. It's the same idea behind IV term structure, applied to the shape of the smile instead of its overall level.

Finding it on a real chain

In practice: pick an expiration, then scan the put and call legs for the strikes whose delta lands nearest −0.25 and +0.25 — most chains display a delta column for exactly this kind of read. Note each leg's IV and subtract. It only takes a couple of comparisons to see whether skew is running steeper or flatter than the last time you checked, without trying to eyeball a whole curve.

You can pull deltas and per-strike IV straight from the chain in the OptionScope workspace, or start with the fundamentals of implied volatility in the learn section.