Volatility Arbitrage
We pursue a market-neutral volatility arbitrage strategy that collects the volatility risk premium. The volatility risk premium is defined as the difference between present implied and future realized volatility, or colloquially as the premium option buyers pay over and above the typical level of realized volatility in order to protect against volatility in an underlying asset; this premium is a persistent feature of exchange-traded options on world equity indexes and other assets, and has been observed by both practitioners and academics alike. Our belief is that a strategy that collects this premium can be profitable while remaining largely uncorrelated with market returns. There is a significant risk of loss in any trading program, and options and futures are not suitable for all investors.
Risk Management
No techniques can eliminate the risk of loss, and investors should be familiar with the particular risks inherent in trading futures, options, and option spreads before investing. We take the following steps in order to reduce certain kinds of risk:
- Restricting application to widely traded indexes and sectors reduces exposure to individual commodity-, equity- or industry-specific events.
- The use of risk-defined, market-neutral option spreads helps reduce the frequency and costs of dynamic hedging.
- Analysis of changes in implied and realized volatility allows us to identify environments in which the volatility risk premium should be bought or ignored, rather than sold.
Disclosure Document
Click here to download the Disclosure Document for this program.