Risk Reversal

The risk reversal plot type is a measure of market implied volatility to both the upside and the downside, and the comparison of how they relate to each other. View an undlerying’s IV Index risk reversal for either maturity or expiration to gauge where the market is pricing in volatility risk in terms of downside put protection or upside call protection.

Open

Enter in a US or Canadian equity ticker or index symbol in the search for symbol box or used the symbol browser tree to search for your desired instrument. Note, IV Index data is only available for US and Canadian stocks and indexes that have listed options. Once the underlying is selected you will see the ticker display in the right side of the dialogue. To remove the symbol, simply click the 'x' to the right of the ticker.

Open

(Tip: When using the symbol tree, the Stocks → By Exchange, Index, Sector etc. branches have ‘Options’ leaves that only display underlying securities that have listed options)

Now you can opt to plot the Risk Reversal using either maturity or expiration via the tabs found below.

By Maturity

Using ‘By Maturity', you can plot any of the virtual option period's current and historical risk reversals by delta. The default is set to the 30 day maturity using the 25 delta.

By clicking in either the ‘VI’ (volatility index) or the ‘Delta’ boxes you can create a new risk reversal and then clicking on the '+' button to add it as a new instrument to be plotted.

You can remove the default risk reversal or any newly created ones by clicking on the risk reversal name (green box containing the maturity and delta).

Once the desired risk reversal(s) have been created, you can now select you style of calculation as either put volatility subtracted from call volatility or call implied volatility subtracted from put volatility. By default, the risk reversals in Barchart for Excel are set to subtract the put volatility from the call volatility.

Once the calculation is set, opt to include the underlying’s total option volume or close or no additional data.

Once all parameters are set, click insert and view the risk reversal plotted in Excel. Below is the AAPL 30 day and 60 day 25 Delta risk reversals overplayed against the closing price of the security. Not how the risk reversal values can spikes can prelude a dip in the underlying stock.

By Expiration

Using the ‘By Expiration’ tab will allow you plot an underlying’s risk reversals using option expirations. When ‘Expiration’ is selected, a drop down menu will be available where you can select a desired monthly or weekly expiry. Multiple expirations can be individually selected or you can select ‘All’ for all expirations, ‘Monthly’ for all monthly expirations and ‘Weekly’ for all weekly expirations. Use clear to remove your selections.

Once the expiration(s) are selected, choose the desired risk reversal(s) to plot by clicking on the various delta options.

Now opt to include total underlying option volume, underlying closing price or no additional data.

Once all parameters are set, click insert and view the risk reversal chart in Excel. For the AAPL chart below, note the increase in option volumes around the peaks and troughs of the 25 Delta risk reversals for the 10/21/22 and 12/16/22 expirations.

Volatility Forecasting

In a general sense, if implied volatility for puts is increasing relative to calls, then that suggests the market is pricing in a larger fear to a downside move. Alternatively, if call volatilties are at a premium compared to put volatilities, one can surmise that market participants are fearing a potential breakout to the upside. If there is belief a large move in the stock or index, plotting the risk reversal gives you the ability to visualize the spread in IV levels to find these opportunities and how the hypothetical trade performed historically. If one is bullish, selling puts with inflated IV levels in relation to calls gives the hypothetical trade a possible theoretical ‘edge’. Underlyings with high levels of reverse skew (puts IV levels 'expensive' in comparison to same delta calls), would be ideal candidates to for the long call / short put risk reversal.