what does 25-delta risk reversal mean?

CFA Level III
#1

lets say long position in risk reversal?

I understant that its a combination of long call and short put.

but what does a 25-delta risk reversal mean?

#2

never mind… found it in CFAI book.

Thanks!

#3

Risk reversal is a weird uncommon way of indicating “zero cost collar”. Someone wanted to sound smart in the curriculum .

#4

The expression 25-delta can be thought of as how sensitive the option is to the underlying asset price movement. e.g. 10-delta is further out of the money than 25-delta. There 10-delta is cheaper.

Also @Audacious I don’t think CFAI said it was always zero cost I think it just said long call and short put.

#5

You know, you might be right. I’m not sure whether the prime on a 25 delta put ALWAYS equal the prime on 25 delta call. If they are always equal, then an “xx delta risk reversal” is a zero-cost collar.

#6

Hi,

can you help me to understand why a 10-delta is further out of the money than a 25-delta and then cheaper than?

thanks

#7

25 delta risk reversals are commonly quoted as they are used as a reference point measurement for skew.