Risk Reversal Metrics are quantitative indicators derived from the pricing of out-of-the-money call and put options, used to gauge market sentiment and directional bias in cryptocurrency options markets. They specifically measure the relative demand for calls versus puts at different strike prices, indicating expectations for future price movements.
Mechanism
The calculation typically involves comparing the implied volatilities of equivalent out-of-the-money call and put options with the same expiration date but different strike prices. A positive risk reversal suggests a higher demand for calls (or lower demand for puts), implying a market expectation for upward price movement, and vice versa.
Methodology
Analyzing Risk Reversal Metrics provides insights into the skew of implied volatility surfaces, helping institutional traders identify potential directional trading opportunities or assess the market’s perceived risk for large upward or downward price swings. The methodology involves monitoring these metrics over time to detect shifts in market sentiment, informing strategic decisions for options hedging, speculation, and overall portfolio risk management in crypto derivatives.
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