This month’s Futures and Options Trader has an article this month about what they call “gamma scalping”. I have heard this name before, and I never connected it to the thing they are talking about in this article. Essentially - if you are buying options, you have a view on vol, if you are delta hedging, and right about vol - you want big gamma, so you can continually buy low/ sell high.

I have talked about this with a few people lately, I figured posting a pointer to the article would be nice

-Chris

(I had this stupid post 75% typed, and my IE crashed… Microsoft, Vista and friends have been GETTING ON MY NERVES!) 

So… I had a recent post about variance swaps. I have been thinking a fair bit about the ideas of volatility - it is after all what options are all about. It is just interesting to me how darn versitile options are. It is possible to put together really novel views of risk depending on your options strategy. Strategies focused on volatility are what I am currently working through mentally. 

How to profit from volatility
Here is a good post on volatility strategies using vanilla options. Essentially - you can put together combinations of options that allow you to “focus in on” and profit based on the volatility characteristics/ changes. They mention the concept of volatility of volatility which reminds me of some work I did in the past with a guy named Lester Ingber - really, really bright guy. 

Volatility of Volatility
Lester’s article on Volatility of Volatility. This is interesting inasmuch as it is another layer of derivation on top of volatility. The idea that volatility itself has volatility is just another example of the complex mechanics that make up the financial world we are part of. We did work in this space looking at ways to achieve “adaptation” of trading system parameters based on volatility - and on volatility of volatility. Lester’s work is excellent - I also suggest reading his CMI work here and his work on Adaptive Simulated Annealing (the work I originally found him for) is also excellent. 

Dispersion Trading 
I have also been working over dispersion trading ideas - here is a good article from IVolatility.com (Good site, I used to get IV info from these guys for implementing an ETF trading strategy based on options and opening range breakout). 

Volatility Arbitrage
Daily options report has a good set of posts on volatility arb’ing. The most recent post is pointing to potential arb opportunities between the VIX and VXN - or the S&P market and NASDAQ market. The article mentions “mean reversion of volatility” - which brings me back to a few years ago… 

Toby Crabel and Mean Reversion
Toby Crabel is a relatively famous trader that popularized (to the best of my understanding) a particular trade patter for stocks and futures based on HV ratios. Essentially - you take a short range return/ longer range return and you get a ratio. This basically says things to you like; “today the volatility is relatively low” or “yesterday the volatility was relatively high”. The idea is based on the concept that “volatility is mean reverting“. This means that when volatility is relatively high, it is more likely it will be relatively low next. Often volatility arbing strategies depend on this concept. I worked through most of the “crabel-isms” a few years back while working on automated trading strategies based on some of Crabel’s ideas. 

All of this volatility stuff does bring me back to past experiences. The difference is that in the past we were looking at this information for different reasons. Currently, I am trying to understand all the more the detailed bits and pieces that would allow you to make trades that allow you to trade a view on volatility… interesting stuff!!! 

-Chris