Risk reversals as a sentiment gauge

[Shadow Trader]

A risk reversal compares the implied volatility of out-of-the-money calls and puts. When calls cost more than puts, the market is paying up for upside protection, and the opposite when puts are pricier. It's one of the better-known sentiment gauges in FX options.

For a pair like EURUSD, a strongly negative risk reversal suggests demand for downside protection, which often accompanies bearish positioning. Extreme readings sometimes precede reversals, but the relationship is loose and noisy.

The data is published by banks and aggregators, usually with a delay and sometimes behind paywalls. Free snapshots appear in market commentary.

For a scalper, the practical use is background: knowing whether the options market leans one way before an event adds colour to the day's expectations. It rarely generates a trade by itself.

The sign convention trips people up. A negative 25-delta risk reversal on EURUSD means puts are richer than calls, so the market favours downside protection on the euro. For USDJPY, the same sign means yen calls versus dollar puts depending on the quoting convention, which is why reading the source's definition is worth the extra minute.

Has anyone integrated options sentiment into intraday decisions, and did it add anything to price action?