Implied Volatility vs. Real Volatility
- Thread starter EliteTraderNYC
- Start date
I read your first book and liked it. I also enjoyed an interview you gave last year where you made a very interesting point. You said something to the effect that market opportunities still exist in trading volatility because there are not good trading instruments that allow a trader to exploit volatility. After future innovations become available to trade volatility, this window of opportunity may close. My apologies if I did not phrase that quite right. In any case, I'm sure your insights on this topic will make your second book a great read.
In a sense, yes. In my cross-asset strategies, I am usually happy to diversify and harvest idiosyncratic risk premium, while hedging away the systematic risk component. However, an extreme idiosyncratic risk event would hurt and one can think of this as extreme break-down of correlation. The bulk of strategies, however, rely on temporary break-down of consistencies of risk factors within a single asset or an asset family - for example, term structures of volatility, predicted dividends or such.
this is the interpretation of what i hear when i read your statement. "harvesting indosyncratic risk".. in a index(parent) , single name (constituent, or basket of constituents) sort of dispersion arb your placing relative pricing bets between the basket and the index.. your looking for things that typically correlate to as you put it "temporarily break down consistencies of risk" consistencies of risk here might be a correlation in volatility or price.. you can be taking views on correlation, volatility, gamma, and or terminal distrobution all at the same time.. ... then pitting one index arb strategy against the other to hedge away systematic risk..
i'm not even sure of any of the techniques employed to exploit relative value in baskets/index arbs.. all i'm doing is running my mouth about what i would try to employ with all the things i've read... interests me alot.. way over my head mathematically... as i have heard so many times before.. reality is messy/dirty.. and models have a bad way of cleaning it up.. simpler with less assumptions and a better understanding of where errors show up ..
the idea of being short gamma to some point.. long convexity deep in the wings.. as well trading convergence but not get nailed in some great decoupling is sort of the aim... making the carry as you have put it before..
Could you please provide an example of this? It is not something I have encountered yet, as I have focused on 'flys and calendars to begin with.
You can be long skew and short local gamma.
He is asking for a specific example... I think.... like what your talking about would be short near the money and more contracts long out of the Money.... your short gamma local long skew... am I right... ratio back spread -1/+2 and ratio writes +1/-2. Doesn't have to be this exact ratio..
Or like being short a straddle/fly against deeper otm back spreads or puts
Long net premium I though referred to long contracts to short contracts. Not dollar amounts long against dollar amounts short... correct me now
The way I read it is he means long risk premium. So it is the guy who is willing to risk more in order to make a bigger profit. On the other hand there is the guy who is risk averse and is willing to be short risk (skew) premium to have his ass covered in case of a crash etc.
Simplest example: the first one sells OTM index puts and the second one buys OTM puts, assuming there is a skew risk premium
Simplest example: the first one sells OTM index puts and the second one buys OTM puts, assuming there is a skew risk premium
long risk premium means you want the cost of equity risk premium to go up (implied volatility to go up or stocks to go down).
short risk means you want the cost of equity risk premium to go down (stocks to go up) or implied volatlity to go down.