what does 25-delta risk reversal mean?

[sachin_patel]

lets say long position in risk reversal?
I understant that its a combination of long call and short put.
but what does a 25-delta risk reversal mean?

 

[sachin_patel]

never mind.. found it in CFAI book.
Thanks!

 

[Audacious]

Risk reversal is a weird uncommon way of indicating “zero cost collar”. Someone wanted to sound smart in the curriculum .

 

[SydCFAL3]

The expression 25-delta can be thought of as how sensitive the option is to the underlying asset price movement. e.g. 10-delta is further out of the money than 25-delta. There 10-delta is cheaper.
Also @Audacious I don’t think CFAI said it was always zero cost I think it just said long call and short put.

 

[Audacious]

SydCFAL3 wrote:
Also @Audacious I don’t think CFAI said it was always zero cost I think it just said long call and short put.

You know, you might be right. I’m not sure whether the prime on a 25 delta put ALWAYS equal the prime on 25 delta call. If they are always equal, then an “xx delta risk reversal” is a zero-cost collar.