Introduction:

Implied volatility(IV or vol) in essence is the expected change in price over a given period and is a useful, if not, slightly peculiar indicator. As IV is a factor in option pricing models with all other things being equal (as in strike price, duration etc) the higher the IV the higher the "price" of the option.
To demonstrate this point clearly we can see below a 1 month EURUSD at the money option contract. On the left hand scale we can see the Implied volatility as a number, often expressed in %. And on the Right scale, we have the premium on the same option.
Here, we can seethe premium (price) is 100 pips or 0.01 (in EURUSD quotes) and it can be seen how the premium fluctuates perfectly with Implied Volatility.
So now that we have the basic idea that the IV is correlated to the "price" of the premium we can use this to analyse in various ways.
Risk Reversals:

An FX risk reversal(RRs) is simply put as the difference between the implied volatility between a Put contract and a call contract that are below and above the current spot price respectively. Simply put IV of call - IV of put.
The market standardfor Risk reversals is using the 25 delta contracts. Now this …
Read article
Translate to English Show original