Volatility Library

Article by: Eric Brandhorst, CFA, Director of Research, Global Structured Products Group
Published by: SSgA CAPITAL INSIGHTS
Date: 2010

“Mention the word volatility to an investor, especially in these recently turbulent times, and what comes immediately to mind is risk, sudden change, erratic behavior, loss and uncertainty—certainly not investable asset class.

“Yet, as we’ll see, there’s a good case to be made for volatility as an asset class, even though there are clearly no coupons or dividends to collect, and there is no claim on an underlying stream of earnings or productive assets.

“As an investment characteristic, volatility describes how much investment returns either have varied, or are expected to vary, from the average over some period of time. Volatility is a common measure of investment risk, and the standard deviation of realized returns is a common measure of volatility where returns are assumed to be normally distributed.”

Full article (PDF): Link

Article by: John Summa, CTA, PhD
Published by: Investopedia
Date: Apr 2009

“Most options traders – from beginner to expert – are familiar with the Black-Scholes model of option pricing developed by Fisher Black and Myron Scholes in 1973. To calculate what is deemed a fair market value for any option, the model incorporates a number of variables, which include time to expiration, historical volatility and strike price. Many option traders, however, rarely assess the market value of an option before establishing a position. (For background reading, see Understanding Option Pricing.)

“This has always been a curious phenomenon, because these same traders would hardly approach buying a home or a car without looking at the fair market price of these assets. This behavior seems to result from the trader’s perception that an option can explode in value if the underlying makes the intended move. Unfortunately, this kind of perception overlooks the need for value analysis.”

Full article: Link

Article by: Matt Cameron
Published by: Risk magazine
Date: 28 Jul 2009

“Dynamic replication of the payoff of volatility swaps on single stocks in illiquid markets is cheaper and easier than replicating variance swaps payoffs, dealers say.

“Activity in variance swaps has died down after volatility spiked in late 2008, causing many dealers to experience hefty losses, particularly in single stocks. The resulting pull-back has spurred dealers to search for other ways to offer volatility trades where clients are not required to delta-hedge options. Dealers such as BNP Paribas are actively pushing volatility swaps as a viable alternative.”

Full article: Link