Volatility Trading
When people say they trade vol, what products are they actually trading? How successful are those strategies?
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Could be a lot of things but one way is with options and delta hedging. If you think implied vol on options is too high you can sell the option and hedge your delta risk through the underlying. Theoretically, and to be overly simplistic, you're just left with vol exposure. Same goes for when you think implied vol is too low. Google delta hedging and gamma scalping for more info on it.
Yeah^ and it’s applied to a greater level… maybe they have a book that’s positioned to be short or long vol, maybe it’s long vol on one part of surface and short on other.
So you can trade vol on a multitude of products across the floors. I think some people kind of think of this wrong though as yes you are trading the vol (you are making prices in terms of the vol you charge) but you aren’t strictly trading that
You are essentially trading options but quoting prices in vol terms (say I make a price for a vanilla 1w option 100 topside) for arguments sake mid is 9 I charge 8.5/9.5 so half around. That’s what you charge. Then you have a plethora of other risks you have to manage. So you have to think about gamma, delta, theta, charm, vanna, Volga, what’s our inventory and strikes, risky sensitivity, what’s our fly sense, then there is a thing called smile theta where you essentially get second order derivative goodies to keep it short,
All of this is a much much more simplified version as to what a vol trader does but hope it give you a better idea
what is smile theta? only heard of the smile in terms of vol. any resources to understand?
Read the Bennett book
do bb trading desks have deep sector knowledge like they do at MM pods?
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