Chapter 3. Trading Volatility Distortions

Key Concepts

• Institutional investors often build complex three-dimensional maps that relate implied volatility to calendar information and price of the underlying security.

• Distortions and anomalies in these maps represent trading opportunities in the form of mispriced volatility.

• Overnight (close-to-open), intraday (open-to-close), and traditional (close-to-close) measures of volatility can vary dramatically. These differences can be used to identify mispriced options and structure statistically advantaged trades.

• Volatility distortions sometimes vary by weekday. These calendar effects can help time entry and exit points for certain types of short-term trades.

Introduction—The Implied Volatility ...

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