What Is Volatility Arbitrage?

Volatility arbitrage is a trading strategy that attempts to profit from the difference between the forecasted future price volatility of an asset, like a stock, and t𒐪he implied volatility of options based on that asset.

Volatility arbitrage has several associated risks, including the timing of the holding 𝓰positions, potential price changes of the asset, and the uncertainty in the implied volatility estimate.

How Volatility Arbitrage Works

Because options pricing is affected by the volatility of the underlying asset, if the forecasted and implied volatil꧙ities differ, there will be a discrepancy between the expected price of the option and its act𝓡ual market price.

A volatility 澳洲幸运5开奖号码历史查询:arbitrage strategy can be implemented through a 澳洲幸运5开奖号码历史查询:delta-neutral portfolio consisting of an option and its underlying asset. For example, suppose a trader thought a stock option was underpriced because implied volatility was too low. In that case, they may open a long call option combined with a short position in the underlyin🦋g stock to profit from that ♒forecast. If the stock price doesn't move, and the trader is correct about implied volatility rising, then the cost of the option will increase.

Alternatively, if the trader believes that the implied volatility is too high and will fall, they may decide to open a long position in the stock and a short position in a call option. Assuming the stock's price doesn't move, the trader may profit as the option falls in value with a decline in implied volatility.

Special Considerations

There are several assumptions a trader must make, which will increase 𝓰the complexity of a volatility ar𒁏bitrage strategy.

First, the investor must be right about whether implied volatility is over-or under-priced. Second, the investorไ🌸 must be correct about the amount of time it will take for the strategy to profit, or the time value erosion could outpace any potential gains.

Finally, if the underlying stock price moves more quickly than expected, the strategy will have to be adjusted, which may be expensive, or impossible depending on market conditions.