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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