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[PLUS] Graphing the 25 Delta Risk Reversal Volatility Skew with Hourly Binance Options

by CryptoDataDownload



Analysis of the 25 Delta Risk Reversal Skew
This is the product of another user request (we love that!) - we will pull the hourly Binance option chains and analyze the 25D Risk Reversal Skew and how it changed during the recent volatility seen at the end of August 2023. Basic terminology: The 25D risk reversal, also known as the 25 Delta Risk Reversal, is a financial metric commonly used in the options market to assess sentiment and market positioning. It can provide insight into the market expectations as to future price movement. The idea is to find a Call with a delta of around ~0.25 and a Put with a delta around -0.25 and the associated implied volatilities with those strikes. The implied volatility (IV) of the Put is subtracted from the Call IV to arrive at a "skew" differential. (Call IV - Put IV = Skew). The reason the 25 Delta strike is used is because the 25 delta mark starts to represent the "tail" of the distribution. The 25 delta zone is in the wings of the option chain, and represents larger movement to the extremes. So the IV of these strikes is monitored to get a sense for which "tail risk" direction is favored by market participants. If the Risk Reversal skew is positive, then call options are being favored. If the risk reversal skew is negative, then put options are being favored. The 25D risk reversal will usually be flat to negative as downside protection is most costly for market participants to put on. However, rather than looking at just the raw metric itself, it can be helpful to analyze the movement of the 25D risk reversal through time in order to visualize the shifting market expectations of market participants as price moves.

Bitcoin Price Action at the end of August 2023

The Code
The code is requires a few steps to get what we want to get done ... but don't worry, we add comments to every line of code so you know exactly what is going on. Basically, we allow the user to submit a range of dates. Our Python script will then go out and download the required option data from Binance. We then need to determine which delta is closest to 25 from all of the option chains gathered. Then, because the data is hourly, we need to loop over each hour and calculate the 25D Skew for each hourly interval. The data is then combined into a large dataframe and graphed.

BTC 25D 1M Risk Reversal Skew with Binance Options Hourly Data


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Notice: Information contained herein is not and should not be construed as an offer, solicitation, or recommendation to buy or sell securities. The information has been obtained from sources we believe to be reliable; however no guarantee is made or implied with respect to its accuracy, timeliness, or completeness. Author does not own the any crypto currency discussed. The information and content are subject to change without notice. CryptoDataDownload and its affiliates do not provide investment, tax, legal or accounting advice.

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THE PERFORMANCE OF TRADING SYSTEMS IS BASED ON THE USE OF COMPUTERIZED SYSTEM LOGIC. IT IS HYPOTHETICAL. PLEASE NOTE THE FOLLOWING DISCLAIMER. CFTC RULE 4.41: HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN. U.S. GOVERNMENT REQUIRED DISCLAIMER: COMMODITY FUTURES TRADING COMMISSION. FUTURES AND OPTIONS TRADING HAS LARGE POTENTIAL REWARDS, BUT ALSO LARGE POTENTIAL RISK. YOU MUST BE AWARE OF THE RISKS AND BE WILLING TO ACCEPT THEM IN ORDER TO INVEST IN THE FUTURES AND OPTIONS MARKETS. DON’T TRADE WITH MONEY YOU CAN’T AFFORD TO LOSE. THIS IS NEITHER A SOLICITATION NOR AN OFFER TO BUY/SELL FUTURES OR OPTIONS. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE DISCUSSED ON THIS WEBSITE. THE PAST PERFORMANCE OF ANY TRADING SYSTEM OR METHODOLOGY IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
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