Introductory Context
"An institutional masterclass on monetizing the asymmetric volatility skew between OTM Puts and Calls on Nifty 50 using Risk Reversals."
Strategy Dossier & Metadata Taxonomy
Strategy: Long Risk Reversal (Skew Trade) | Market: NSE Index Options | Structure: Sell High-IV OTM Put + Buy Low-IV OTM Call | Edge: Volatility Skew Arbitrage
1. The Core Principle in Plain English
In Indian markets, OTM Puts trade at a significant volatility premium over OTM Calls because institutions bid up puts for portfolio insurance (the Volatility Smile / Skew).
A Risk Reversal monetizes this distortion by selling an expensive, high-IV OTM Put and using the rich proceeds to buy a cheap, low-IV OTM Call, establishing leveraged bullish exposure with a net credit.