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 Volatility Arbitrage
Issued on April 19 2010 par Tryphon Duranton
Volatility Arbitrage, sometimes called Volatility Bets, is a alternative way to manage money using markets and derivatives.
Volatility arbitrage is a kind of asset management that leads to alternative investments, aka Hedge funds.
I - An Idea The main idea set deepdown in the heart of option structure. An option is a financial product that is sensible to volatility. II - Illustration To grasp that point, let's see how volatility variations make an option value to vary. ■ Volatility= 20% Call is worth $ 10.45  ■ Volatility= 30%, the call is worth $ 14.23  ■ Volatility= 60%, the call is worth $ 25.52  It is then possible to bet on volatility variation and make money on how volatility is able to change. For instance, → buying options can be a great trade to benefit from an increase in volatility → selling options can be a trade to benefit from a decrease in volatility. III - Constraint As far as we have positions on options, there is an exposure in which direction market will move. The point is that in order to be only exposed to implied volatility, one needs to erase market moves on the p&l. That leads to the concept of delta hedged portfolio. Next : Calendar Spread: A First Approach Previous : Risk-Reversal Download the pricer here Advanced Strategies - INDEX Advanced Strategies - CHAPTER I Advanced Strategies - CHAPTER II Advanced Strategies - CHAPTER III Advanced Strategies - CHAPTER IV Advanced Strategies - CHAPTER V Tryphon Duranton |
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