Volatility Arbitrage - How does it work? - Options Trading Lessons 

Man, I'm going back and watching your older videos. The filming and lighting is much better now. The content is still gold nonetheless.

Patrick RU-vid doesn't deserve you! You are by far the best resource for the inner workings of options in a manner retail can understand.

As a fellow options trader, I love how you approach the options markets from a solid mathematical perspective. Me and my friend, who is also an options trader, always laugh with the youtube videos about the "option educators" because they make one mistake after another, like saying that covered calls are better than naked puts not knowing they are synthetics or not understanding that delta changes in a nonlinear way or not understanding that it is more about EV than probability of profit (even though probability of profit changes the betting size) and so on. (In my experience, peaks in volatility are a sign of a strong uptrend or downtrend reversing, so my strategy is always to sell volatility in that strategy and have some delta in the opposite direction by reducing it but not eliminating it completely, work just the other day with the silver crazy, was long $12 calls and short $50 calls at a 1:4 ratio) Good job!

Great series, thanks for making

Very awesome. Best channel period.

Good explanation

excellent video, thanks a lot!

excellent videos! priceless.

EXCELLENT! I’ve been using RU-vid to (usually in vain) enhance my never-ending quest to better understand derivatives - and specifically options, how to determine the optimal trading strategies for the volatility regime, etc. I had plenty of calculus while at University and then an engineering career that actually required me to use it (not that it has given me as much “edge” as I initially imagined - when I discovered options - and that their pricing (in part) - is accomplished with probability-based price model... which is in the form of a very simple second-order differential equation. When I finally began to actively trade, I desperately tried to make it as complex as possible... but over time had to admit that consistent success was most easily obtained by excessively SIMPLIFYING everything (although I was dismayed to find out my Excel generated volatility surfaces... were, at best, unnecessary. In fact if truth br told - I probably spent the better part of two YEARS trying to (yes, I admit it) develop the Holy Grail - in the form of a STRATEGY (and the more complex the better!). Meanwhile - however, I WAS actively trading every day, of course recording my trade parameters - and of course the results. Finally I “consciously” realized what I had probably already known - on some level - for quite awhile. That simply by using standard strategies (which CAN be significantly tweaked and optimized - which also, of course are suitable for both current skew and volatility structure (all of which is pretty straight forward... it’s those random four, five, or evev SIX sigma marker moves, that keep us on our toes). And IN FACT, the way you survive those - is ALSO the way you succeed in general. Which of course is NOT typically a function of your strategy choice - but of your so-called Money Management plan. Of course this is nothing but 9th grade algebra and a little undergraduate statistics, but the efffects of different “plans” on what REALLY matters - your equity curve - is really hard to overstate. Also, once you get to that point where you are successful consistently, then you can also start to experiment using shpecific compounding approaches. I’m still often amazed at the potential outcomes - of even modest compounding - given that with options - making 5% of your total account - every WEEK - is nothing special (though risk management becomes critical. I apologize for the long-winded comment (and ALL of the typos - on a keyboard I can type almost as fast as I can think - but NOT SO on these tiny damn phones)... my point was primarily to thank you for this whole series on dynamic hedging - a concept thst I might have learned a bit too early in my education- as the math and overall mechanics was very clear - yet I’ve never actually used it because I’ve lacked a full “grasping” of the subject - and just knowing the steps to take does not give me enough comfort level to put skin in that game. So perhaps I wasn’t ready yet, or perhaps your VERY concise lecture ability - and teaching style is what mattered. Is that shameless pandering to win the book? No - for all I know the contest is over. If not I will wait and see - having a autographed version would be an excellent addition to the library. But if that’s not possible then for sure - I will purchase it. Thanks much, T.

amazing work

Thats brilliant, would have been a great strategy during the crash and subsequent weeks in march

Great video!

Love the videos, so much important information to take in. I would suggest turning down the volume on the intro song a little bit.

Excellent!

thanks for your videos mate

Thank you for this info. Could this be done using a combination of SQQQ & TQQQ and playing off the other?

I finally understand what volatility trading is :)

Would you mind creating a playlist with regards to this subject ?

How do you know how far in the future to make the expiration date and how many dollars up or down the strike prices are?

Nice video, my question is how to pick the right options for the gamma scalping, how do we compare real volatility vs implied volatility? That explanation would be great 🙂 also real examples of trading floor insights

thx bro

So it is a bet on high or low volatility if i get it right. For a moment a thought it be a way to make money with bitcoin before i relized that options would be prized in and nobody is selling and buying crypto on that frequency since it is to expensive and slow.

Dude I have a question this is making a lightbulb go off. Follow me here.. APRE 0 volume May 15th calls. Obviously IV is low.. all time low or near it. 30-50% below PT by analyst. Could you not sell at the ask to the market makers for less than you paid on an IV Spike?

Do you necessarily have to hedge your deltas with long/short shares?

STONKS!

hi, thanks for your videos, i guess u are new to youtube, but your experience in options is amazing. I just wonder if u hv planned on explaining further on vol arb. 1. say... give examples of the entire trade "cycle". u've explained the IV from low to high, how about high to low. 2. And when would be a good time to maintain net 0 positions, and when do I initiate new positions ? eg. IV is low when its below 32. when it cross 32, u buy iv ? And high iv defined as say.. 64% do u then sell after it cross 64 and lower ?

Maybe somebody already asked this, but if you buy an OTM call and the price doesn't move, the call stays out of the money and the delta would have to got to zero and if you buy an ITM call and the price doesn't move, the call stays in the money and the delta would have to got to 1. that would mean you would sell or buy back the shares you hedged at the same price so you would still lose the full premium of the call, but the delta does change even if the price stays the same doesn't it?

People who sell options usually assume the volatility will stay close to what it was in the recent past?

Greeks attribution: Delta PnL: delta * dSpot Gamma PnL: 0.5gamma * dSpot^2 Theta PnL: theta * dTime Vega PnL: vega * dIV

Am I right to assume that when IV is low, purchasing a long dated straddle and hedging it daily till 90 days exp would be a profitable strategy?

so clearly explained. complicated things on textbook become so simple

16 pc IV should mean 1 SD of forecast annualised realised volatility over life of option is 16 pc

In the long and right case, could some one explain why we hedge by buying when the delta is zero and hedge by selling when delta is 1. I thought it was the other way round. We have to buy the full notional when delta is 1 and when it is zero essentially there is no hedge and hence we sell all the underlying

Can retail investors utilize volatility arbitrage?

a DEALER takes the other side of your trade/transaction/order... a MARKET MAKER sets the price for the asset that is traded. Dealers are liquidity providers. some brokers do this too. Market makers are Central Banks that set the price for the currency OR the price engine / price algorithm that sets the price for futures using the bid/ask

Hey Patrick, is this strategy a good way to get started in options trading?

Why do many traders trade on volatility? Is it easier to know when the realized volatility is below or above the market forecast than betting on stocks directly?

How do we effectively manage the gamma risk exposure?

Not meaning to be pedantic. I am a bit of a noob, but isn't 16% vol a 0.8% daily move?

so it seems the frequency of dynamic hedging impacts the profitability of the strategy. Anyway, very good video!

No one has commented on the sound of the person who enters and proceeds to shave with an electric razor for the last five minutes of this video? Impossible.

Thank you. Very informative but in my view had to watch the video like 5+ times and still could not make it into a practical procedure to trade. I bought the book to find a way to make it a strategy that I can implement. I'm doing CSP and rolling them until expire OTM. Hugely profitable for sure, but require to hedge constantly against black swans all time. I could settle with less profit and more peace of mind.

You have good content but you should use some examples and graphics to explain

I bought 1 call and 1 put, both ATM and hedging the delta. The underlying IV was below its historical average, yet both contracts lost money as IV increased. My question would be is this volatility trade still possible if someone is simply buying delta hedged puts and calls when the IV is low, or does this only involve those who are writing the options into the market?

I became a millionaire using $2,000 & implied volatility thanks so much

You're right in pointing out that it isn't actually arbitrage and it really pisses me off that the word 'arbitrage' is misused all over the place, particularly with 'retail arbitrage' which is nothing more than simple trading. You buy something cheaply and then hope to sell it for more money. That's trading. Not arbitrage. Stop using this word incorrectly.

gotta make it simpler for the masses man