Risk Reversal and Butterfly Conventions in Volatility-Surface Quotes

Summary

The document distinguishes the risk-reversal trading strategy from the market convention used to quote a risk reversal on a volatility surface. A risk reversal combines a call and a put, often selected at specified delta points, while the quotation convention identifies those points so delta-hedging traders can translate the quote into option positions. More generally, traders can define the combination using other deltas, strikes, or proportions.

The answer also describes the intended Greek exposures of common smile structures: an at-the-money position is associated with vega, a risk reversal with vanna, and a butterfly with volga. These are presented as simplified exposure descriptions rather than a full replication or hedging analysis. The text offers no empirical comparison or market-specific detail, and the exact convention may vary with the quoted delta points and construction used.

Key ideas

• A risk reversal is a call-and-put strategy, while its quoted form follows a market convention.
• Specified delta points help traders interpret quotes and size delta hedges.
• Risk-reversal definitions can vary by delta, strike, or relative option quantity.
• The answer associates at-the-money, risk-reversal, and butterfly structures with vega, vanna, and volga exposure, respectively.

Tags

# The name conventions such as ATM, Risk reversal and Butterflies to construct volatility surface


# The name conventions such as ATM, Risk reversal and Butterflies to construct volatility surface












Why people call (vol call - vol put) risk reversal when risk reversal actually is (call 25 delta -put detlta +25)? when constructing volatility surface? The vol of risk revesal should not be vol call - vol put? Is the terminology just for the sake of convenience?

thanks

## Answer by CleverseekerRover1 (score 2)

https://quant.stackexchange.com/a/44396

Essentially you are trading spot vs. implied volatility with a RiskReversal so you have no exposure to Vega or Volga, but what you do have with a RR is exposure to Vanna, which is 2nd order greek and measures how quickly vega changes at the spot level. ATM is exposed to Vega, but not Vanna or Volga and with a Butterfly, you are trading the wings of the smile so your exposure is Volga, but no Vanna or Vega. Hope this helps.

## Answer by xflowXen (score 1)

https://quant.stackexchange.com/a/43848

Its the difference between the strategy (i.e call - put) and the actual trading convention.

In the market - the quotation convention is to use the 10/25 delta points. Its so traders who are delta hedging have an easier time of understanding how many contracts they need to hedge.

If you talk about it in more theoretical terms then you can have any combination of delta/strikes/percentage to define a risk reversal.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.