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Comparing Implied and Realized Volatility for Gamma Trading

Article Quant Q&A · Author: Scehewekan
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Summary

The document asks how to assess a possible volatility trading opportunity when an investor has a view of a stock’s volatility over time and observes options with different maturities priced at different implied volatilities. It focuses on whether the difference between that volatility view and the implied volatility levels could support a strategy such as gamma trading.

No answer or trading method is provided. The question does not specify how the volatility forecast is formed, how option prices across maturities should be compared, or how to account for hedging costs, carry, or risk. As a result, it identifies the central comparison—forecast volatility versus the volatility embedded in option prices—but supplies neither evidence of an exploitable edge nor a decision rule.

Key ideas

  • The question compares a forecast of the underlying’s volatility with implied volatilities across option maturities.
  • Gamma trading is raised as a possible way to express a volatility view.
  • The document provides no method for deciding whether the volatility difference is tradeable.
  • A practical assessment would need to consider forecasting quality, hedging, costs, and risk, which are not addressed here.

Tags

OptionsVolatilityDerivatives pricing
Full text
# When is implied volatility greater than realized volatility?


# When is implied volatility greater than realized volatility?












Assume it to be known that the volatility of a stock at any point in time is $\sigma(t)$.

My question is, if we have a number of options priced using some implied volatilities $\sigma_1, ..., \sigma_i$ on the same underlying, different maturities, how do we determine whether this is an exploitable situation, e.g. using gamma trading?

How do I compare my knowledge of $\sigma(t)$ to the multiple $\sigma_i$s and determine what to do?

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.