Traditionally, to make a profit, most individual investors and fund managers are forced to take a view on the direction of the price of something. The traditional or fundamental strategy is to study all the aspects of the market-place, all the factors affecting the price or that might affect the price. In addition, many also consider what are known as the technical factors. Technical analytic methods use the sequence of previous prices to come up with an investment recommendation. However, whether following fundamental analysis or technical analysis or a combination of both, the ultimate investment decision is that one has to buy or sell something. The traditional investor has to take a view on the direction of the price. Most investors then focused on their respective stock markets. With the growth of the derivatives industry, investors now have a choice.
[...] This volatility is meant to be forward looking and is calculated from both calls and puts. The VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge" or “fear index”. It tests investors' sentiment and volatility. The VIX was introduced in 1993 by Prof. Robert E. Whaley of Duke University or CBOE? As a weighted measure of the implied volatility of eight S&P 100 at-the-money put and calls options. In 2003, its underlying index was changed from the CBOE S&P 100 index to the CBOE S&P 500; a broader index which allows for a more accurate view of investors' expectations on future market volatility .It also does not use the Black Scholes pricing model in calculation as the previous VIX did. [...]
[...] Once again, the bottom straggle is proved to be a strategy of longing volatility Top Strangle Similarly, the Top Strangle is constructed by shorting a call with strike price of K1 and a call with strike price of K2 (K1 [...]
[...] The values of both calls and puts increase as volatility increases. Examples include: Buying Volatility - Reverse covered call The simplest buying volatility example is to long call and short stock(s). Graph 1 One-year call price(left) and Delta of one-year call option(right) Source: Kevin B. Connolly Here is an example. This long volatility strategy is to have a portfolio long of one option contract (giving the buyer right to buy 100 shares in negotiated date and price) and to be simultaneously short 50 shares for delta neutral. [...]
[...] Example of Trading Volatility Each time a transaction takes place, one party will make a profit and the other will lose. Each day that passes will cause one party to lose through time decay and the other to profit. At expiry, the profits (losses) to one party will exactly match the losses (profits) to the other. Traders use two fundamental parameters in decision making: implied volatility and statistical volatility (this refers to the volatility of the underlying asset measured over time. [...]
[...] So being short of volatility and suffering significant price moves always involves selling low and buying high—the exact opposite of being long of volatility. The rehedging process, although always re-establishing a neutral position, locks in losses. Selling low and buying high is a direct result of the fact that the delta of the option position moves in the opposite direction to that of the underlying or put more simply the position has negative gamma. The position is short gamma and this expression is sometimes used instead of short volatility. [...]
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