Volatility Modelling and Trading

Abstract

We provide a practical and technical overview of volatility trading strategies: 1) The insight for the design and back-testing of systematic volatility strategies 2) Understanding of risk-reward trade-off and potential pitfalls of volatility strategies We focus on systematic and rule-based trading strategies that can be marketed as an investable index or a proprietary strategy: 1) Delta-hedged strategies for capturing the volatility and skew risk-premiums 2) Without delta-hedge: CBOE and customized options buy-write indices We overview important implementation aspects: 1) Measuring the historic realized volatility 2) Forecasting the expected realized volatility 3) Measuring and forecasting implied and realized skew 4) Computing option delta consistently with empirical dynamics 5) Analysis of transaction costs 6) Managing the tail-risk of short volatility strategies

Keywords: Volatility, Trading, Investment Strategies

JEL Classification: C00, G00