Being Right is Not Enough: Buying Options to Bet on Higher Realized Volatility

24 Pages Posted: 26 Sep 2018 Last revised: 17 Oct 2018

See all articles by Roni Israelov

Roni Israelov


Harsha Tummala

AQR Capital Management, LLC

Date Written: September 12, 2018


Speculators who wish to bet on higher future volatility often purchase options to “go long volatility.” Should investors who buy options expect to profit when realized volatility increases? If so, under what conditions? To answer these questions, we conduct an analysis of the relationship between long volatility performance (buying options) and contemporaneous changes in volatility. We find that buying one-month S&P 500 options is only consistently profitable in the highest decile of changes in one-month volatility. Buying options consistently loses money in the lowest seven deciles of changes in volatility. We then study the trade entry and exit timing required to retain the profits from long option positions during significant volatility increases. We find similar results between the S&P 500 options market and global equity option markets.

Keywords: Options, Protection, Portfolio Protection, Tail Protection, Tail Risk, Volatility Risk Premium, Variance Risk Premium, PutWrite, Put-Write, BuyWrite, Buy-Write, Covered Call, Covered Calls, Call Overwriting, Overwriting

JEL Classification: G00, G10, G11, G12, G13

Suggested Citation

Israelov, Roni and Tummala, Harsha, Being Right is Not Enough: Buying Options to Bet on Higher Realized Volatility (September 12, 2018). Available at SSRN: or

Roni Israelov (Contact Author)

Independent ( email )

United States

Harsha Tummala

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

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