Risk Reversal
The term risk reversal will mean different things in different asset classes. Usually, it refers to a strategy of simultaneously selling an OTM put and buying an OTM call. More broadly, it can refer to any position where the gamma/delta of an option strategy switches from positive to negative at some point.
Volatility Smiles - An Example
Let us assume that implied volatility for a 3-month EUR/USD ATM option is 9.20%. The spot rate is 1.2084. The 25% delta options have strikes of 1.1761 (put) and 1.2524 (call). Implied volatilities are 9.51% and 9.21% respectively.
What are the values for the 25% delta butterfly and 25% delta RR?
25% butterfly
The size of the smile can be determined by finding the difference between the average of the implied volatilities and the ATM implied volatility.