20 lines
1.6 KiB
Plaintext
20 lines
1.6 KiB
Plaintext
Chapter 39: VolatiDty Trading Techniques 845
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lying instrument. Upon finding such discrepancies, the trader attempts to take
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advantage by constructing a more or less neutral position, preferring not to predict
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price so much, but rather attempting to predict volatility.
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Most volatility traders attempt to buy volatility rather than sell it, for the rea
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sons that the strategies inherent in doing so have limited risk and large potential
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rewards, and don't require one to monitor them continuously. If one owns a straddle,
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any major market movements resulting in gaps in prices are a benefit. Hence, mon
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itoring of positions as little as just once a day is sufficient, a fact that means that the
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volatility buyer can have a life apart from watching a trading screen all day long. In
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addition, volatility buyers of stock options can avail themselves of the chaotic move
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ments that stocks can make, taking advantage of the occasional fat tail movements.
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However, since volatility and prices are so unstable, one cannot predict their
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movements with any certainty. The vagaries of historical volatility as compared to
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implied volatility, the differences between the implied volatility of short- and long
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term options, and the difficulty in predicting stock price distributions all compli
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cate the process of predicting volatility. Hence, volatility trading is not a "lock," but
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its practitioners normally believe that it is by far the best approach to theoretical
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option trading available today. Moreover, most option professionals primarily trade
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volatility rather than directional positions. |