The video uploader here lectures around Paul Wilmott's theory of exploiting deviations between implied and actual volatilities.
As much as some may call this trade an arbitrage, actual markets do not offer certainty in net profit at the end of each trade.
Implied vol doesn't always follow actual, sometimes it feels the other way around. I don't have the exact stats.
Theta is the main issue for long vol positions. An accurate estimate for the average cost of theta before vol hits target is required for realistic PnL.
To get a true sense of expected return each trade, actual cost of potentially dynamic delta hedging, associated transaction costs must be estimated accurately. So we might be left with only the long volatility side being likely profitable over time.
There's also the issue of stopping time, it sometimes takes a while for implied volatility to converge with actual/historical, so if there's need to roll positions over expiration dates, that means more expenses.
There's still money to be made off this logic, it's just not THAT easy given Wall St. competition today is filled with math PhDs.
Quick correction for the last comment about determinism of this theory,
"
As much as some may call this trade an arbitrage, actual markets do not offer certainty in net profit at the end of each trade.
Implied vol doesn't always follow actual, sometimes it feels the other way around. I don't have the exact stats.
Theta is the main issue for long vol positions. An accurate estimate for the average cost of theta before vol hits target is required for realistic PnL.
To get a true sense of expected return each trade, actual cost of potentially dynamic delta hedging, associated transaction costs must be estimated accurately. So we might be left with only the long volatility side being likely profitable over time.
There's also the issue of stopping time, it sometimes takes a while for implied volatility to converge with actual/historical, so if there's need to roll positions over expiration dates, that means more expenses.
There's still money to be made off this logic, it's just not THAT easy given Wall St. competition today is filled with math PhDs.
Quick correction for the last comment about determinism of this theory,
"
... Getting rid of the dX part makes the randomness go away, you're left with a deterministic equation.
"
