Paul Wilmott on Quantitative Finance, Chapter 12, How to arbitrage volatility

In chapter 12 I learned how to make money by trading on the differences between actual and implied volatility. One choice you have to make is whether to hedge using implied or actual volatility; they have different consequences in final profits and how you get there.

Category:

Education

Tags:

• math
• finance
• quant
• hedge
• arbitrage
• volatility
• black-scholes
• options
• implied volatility

[NathanWhitehead]

@wadtk You're right, I misspoke. Getting rid of the dX part makes the randomness go away, you're left with a deterministic equation. Thanks for the correction!

[wadtk]

Shouldn't the final equation we get be deterministic because there is no dX and only dt? I think you said it's non-deterministic.

[NathanWhitehead]

@oligiscool1 Thanks! You are 100% right, the delta hedging strategy I talk about is very costly because of bid/ask spread and commissions. But still it is exciting because it is the first real example in the book of how to apply superior knowledge about the market into actions that (potentially) make you money.

[oligiscool1]

that is quite interesting, but in real markets there are bid/ask spreads in prices as well as commission costs. delta hedging is thus not really possible to do with any great precision for an individual investor (and even for some smaller institutions).

good videos overall. thumbs up.