Volatility Harvesting

          

An intriguing read, “Volatility Harvesting: Extracting Return From Randomness” covering a range of topics including volatility pumping, volatility harvesting, Parrondo’s Paradox, and Shannon’s Demon.


Volatility as an Asset Class

          

A nice overview of the cyclical nature of volatility trading by Jonathan Kinlay entitled, “The Case for Volatility as an Asset Class”. For options traders, the idea of volatility as an asset class is taken for granted. For most others, it’s likely they’ve never given these strategies much of a thought. That’s unfortunate given the excellent diversification (i.e. uncorrelated returns) provided by most volatility strategies.


Rule of Sixteen

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The “Rule of Sixteen” is a simple approximation used by option traders to quickly get an idea of the potential move a particular underlying security might make. As a quick example, suppose it’s a day before expiration and you’re trying to determine how concerned you should be about covering a position of out of the money options. The Rule of Sixteen says that with an implied volatility of 32 there is about a 2/3rds chance that the underlying will move 2% or less in that one remaining day. One out of every three days the underlying will move more than 2%.


Path Independence of Volatility

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Volatility is undoubtably one of the most important aspects of option trading. Although the basic idea of calculating historical volatility as the annualized standard deviation of a series of lognormal close to close price returns is fairly simple, there exist a broad range of adaptations of this general idea in an attempt to glean additional insight and efficiency from market data. Nonetheless, this traditional method of calculating volatility is still in wide use due to the simplicity of its calculation and the intuitive nature of its insights.


Volatility of VIX

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The S&P 500 index (SPX) has been down five of the past six trading sessions and along with that has come a significant increase in the VIX implied volatility index. But the most interesting aspect of the selloff is not the current level of the VIX, but the size of the increase and the speed with which it’s taken place, or in other words, the volatility of implied volatility.