Kenneth R97 Smith#49

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What is risk reversal in forex options trading?

A risk reversal involves buying a call and selling a put (or vice versa) to express directional bias with reduced cost. For example, a trader bullish on USD/JPY may buy a call and finance it by selling a put. Institutions use risk reversals to hedge or speculate with minimal upfront cost. Option skew (relative pricing of puts vs. calls) reveals market sentiment—if puts are pricier, it signals downside fear. Retail traders can study risk reversals indirectly via broker sentiment or option reports. Risk reversals illustrate how option markets not only hedge but also measure sentiment in forex.