Volatility arbitrage

In finance, volatility arbitrage (or vol arb) is a term for financial arbitrage techniques directly dependent and based on volatility.

A common type of vol arb is type of statistical arbitrage that is implemented by trading a delta neutral portfolio of an option and its underlying. The objective is to take advantage of differences between the implied volatility[1] of the option, and a forecast of future realized volatility of the option's underlying. In volatility arbitrage, volatility rather than price is used as the unit of relative measure, i.e. traders attempt to buy volatility when it is low and sell volatility when it is high.[2][3]

  1. ^ Mahdavi Damghani, Babak (2013). "De-arbitraging With a Weak Smile: Application to Skew Risk". Wilmott. 2013 (1): 40–49. doi:10.1002/wilm.10201. S2CID 154646708.
  2. ^ Javaheri, Alireza (2005). Inside Volatility Arbitrage, The Secrets of Skewness. Wiley. ISBN 978-0-471-73387-4.
  3. ^ Gatheral, Jim (2006). The Volatility Surface: A Practitioner's Guide. Wiley. ISBN 978-0-471-79251-2.