Monday, March 19, 2012

Theoretical edge off Volatility Smile

Noticed this video from LibanmanFutures.

I like the mixed spread exploiting the volatility smile, and I wanted to add some thoughts:
  • A dynamic delta hedge would likely reduce volatility of the trade's returns
  • Having the actual return distribution as a known unknown; from the BSM perspective, we're likely to have a genuine edge with the seemingly undervalued options, and not so much if the others are really undervalued.
  • Having an additional filter via a numerical fit of the volatility smile would likely give the trade some more of an edge.

0 Reflections: