Strategies · Library · Volatility
§7.4Volatility
Volatility risk premium
Options tend to be priced for more movement than occurs, so sell index straddles when implied volatility sits above the realised figure. It pays in quiet markets and loses in sell-offs.
- Asset class
- Volatility
- Held for
- Weeks
- Data
- ARCANE has part of the data
- Symphony
- Cannot be built as a symphony
The rule
- Signal
- VIX today against the index's realised volatility over the past month.
- Entry and exit
- Sell the straddle when the gap is positive; hold to expiry.
- Sizing
- One straddle per index.
How it fails
- Tail losses when volatility jumps
- Short options carry large margin
- Gap risk
Data it needs
- VIX
- index option prices
- index daily returns
VIX and index closes are available; option chains are not.
How ARCANE uses it
The VIX-minus-realised gap can be computed from closes and cited as evidence in a Call about calm or stress.
Selling options cannot be written in a long-only stock and ETF builder.
Filed under the volatility card
Hold less after a month of high volatility and more after a calm one. The paper found this raised return per unit of risk, because volatile spells are not paid for with higher returns.
A paper plan from this card holds 5 to 63 days, stops at 2.5× the expected move and uses at most 50% of your risk budget. The card
Source: Kakushadze and Serur (2018), 151 Trading Strategies, §7.4, p. 84 of the SSRN version. Described in our words. Volatility is ARCANE’s filing, not the book’s.