Volatility trading

Not to overstate the obvious, but if you sell half of your GENR, we assume you must still have the other half

 

Ya ya optioncoach lol

 

Bought some HUG here

 

Might buy some WRES too -- if I do it'll be very light

 

What "negative tone"? You mis-named your thread, so people who got misled tell you so.

 

The implied volatility smile is the result of the market pricing in the probability of black swan events.

 

Is that true? Couldn't you arb out the iv if that were the case?

- The New Guy

 

No, the +skewed strike put and call must trade at equal vols. This is inviolate. There is no method by which to arbitrage the vol smile. You can buy cheaper vols through replication, but that's not an arbitrage, it's a pairs-trade with large correlation risks.

You would hold a reversal arbitrage at incredible edge if it were possible to somehow trade mean volty and sell +skewed otm put volty[itm call volty]. There is no greater potential in an otm reversals than an atm reversal. The same can be stated concerning conversions if trading deep itm +skewed calls.

 

I wasn't thinking the same strike, but more like short/long straddles or something at different vols. I guess the reason would be that the smile may flatten or steepen, no way to know which?

I'm sure there's no way to do this, a little too obvious. Just trying to understand why it's a no-go.

Thanks,

- The New Guy

EDIT: Spread, not arb

 

That would form the basis of a VIX swap or replication. Going long or short the strip vols. Useful for trading basket volatility strategies, but not something of great allure unless you're interested in hedging vol exposure and want a cheaper to deliver solution than buying otm skews.