Currency SentiMeter Explained:
Our Currency SentiMeter looks at the Risk Reversals of currencies. Risk Reversals measure the pricing relationship between Puts and Calls of the same delta (the distance from current market price) and the same time to expiration. Bloomberg describes the Risk Reversal as “…a measure of the skew in the demand for out-of-the-money options at high strikes compared to low strikes and can be interpreted as the market view of the most likely direction of the spot movement over the next maturity date. It is defined as the implied volatility for Call Options minus the implied volatility for Put Options on the base currency with the same delta.”
