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Risk Reversal

You want synthetic BTC exposure without buying spot. No funding rate. No liquidation. Zero cost. A risk reversal does this.

Sell an OTM put, buy an OTM call. The put premium finances the call. If BTC rallies past your call strike, you profit dollar-for-dollar. If it crashes through your put strike, you lose dollar-for-dollar. In between, nothing happens.

But a risk reversal isn't just a trade. It's the most-watched number on every vol desk in crypto.

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The 25-delta risk reversal is the most-watched skew metric in vol markets. When it's negative, the market is pricing crash risk. When it's positive, rally risk. Trading a risk reversal is trading skew directly.

What You Do (Bullish)​

The Setup
Sell1 OTM put (below current price)
Buy1 OTM call (above current price)
Max Profit
Unlimited (upside)
Max Loss
Substantial (downside)
Cost
Near zero
Breakeven
Depends on skew

Flip it for bearish: sell an OTM call, buy an OTM put. Same structure, opposite direction.

How the P&L Works​

Three zones. Clean and simple.

  1. Above the call strike. The call is ITM. Profits grow linearly. The put expired worthless. You're synthetically long from the call strike.
  2. Between the two strikes. Both options are OTM. If the trade was zero-cost, P&L is flat at zero. BTC can move 15% in this dead zone and you don't make or lose a dollar.
  3. Below the put strike. The put is ITM against you. Losses grow linearly. You're synthetically short from the put strike. There is no floor.

Worked Example​

BTC at 96,500. You're bullish over the next month but you don't want to tie up capital in spot. Put skew is steep -- the 25-delta put IV is 8 points above the 25-delta call IV. That means puts are expensive. Perfect for selling.

Sell 88k put (25-delta) for 1,850. Buy 105k call (25-delta) for 1,850. Net cost: 0.

BTC at Expiry
Short Put
Long Call
P&L
$72,000
-$16,000
$0
-$16,000
$80,000
-$8,000
$0
-$8,000
$88,000
$0
$0
$0
$96,500
$0
$0
$0
$105,000
$0
$0
$0
$115,000
$0
+$10,000
+$10,000
$130,000
$0
+$25,000
+$25,000

Zero capital deployed. If BTC rallies to 130k, you make 25k. If it crashes to 72k, you lose 16k. Between 88k and 105k, nothing happens. That 17k dead zone is the price of the zero-cost structure.

Explore the Payoff​

Spot at Expiry$100k
$70k$130k
Net Cost$0k
$0k$5k
BE $90k$0+$20k-$20k$70kK1 $90kK2 $110k$130kSpot Price at ExpiryP&L
Settlement
$100k
P&L
+0.0k
Max Loss
Substantial
Max Gain
Unlimited

When to Use​

  • You have a strong directional view and want leveraged exposure at zero or near-zero cost
  • You think skew is mispriced. Puts are too expensive relative to calls (or vice versa) and you want to monetize that view
  • You want synthetic long/short exposure without buying the underlying, paying funding, or facing liquidation
  • You're a fund that needs to get directional exposure capital-efficiently. The zero-cost structure is why risk reversals dominate crypto fund books

The ETH risk reversal flipped positive before the Merge, signaling that the market was pricing rally risk over crash risk for the first time in months. When the 25-delta RR moves, desks pay attention.

Common Mistakes
The mistakeTreating it as free money because the entry cost is zero.
The realityZero cost doesn't mean zero risk. You have unlimited downside through the short put. The 'free' entry is financed by accepting crash exposure. If BTC drops 30%, your short put is deep ITM and you owe real money.
The mistakeIgnoring the dead zone between strikes.
The realityIf you sell the $88k put and buy the $105k call, BTC can trade between $88k and $105k for a month and your P&L is exactly zero. That's a $17k range of nothing. If BTC grinds from $96k to $104k, you made nothing. A spot position would have made $8k.
The mistakeNot monitoring the short put as a standalone risk.
The realityThe short put is a real obligation. If BTC drops to $82k and your put is at $88k, you're down $6k and growing. Treat the short put the way you'd treat any naked short -- with a stop-loss or a hedge plan. The long call being worthless at that point doesn't help you.

Greeks at a Glance​

Greek
Sign
Plain English
Delta
+
Net long delta (bullish RR). Behaves like a leveraged long position. The combined delta of a 25-delta call and short 25-delta put is roughly 0.50.
Gamma
+/-
Long gamma from the call, short gamma from the put. Near the middle, gammas roughly offset. Near either strike, one dominates.
Theta
~0
Long and short theta roughly offset. The call bleeds theta; the put earns it. Near zero at entry.
Vega
Skew
Long call vega, short put vega. Net vega depends on the skew level. When puts have higher IV than calls, you're net short vega.

Related:

  • Long Call, the long leg of a bullish risk reversal
  • Cash-Secured Put, the short leg, isolated
  • Skew, the vol surface shape that drives risk reversal pricing
  • Collar, risk reversal + underlying (bounded range)
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