DEFINITION of 'Volatility Arbitrage'
Trading strategies that attempt to exploit differences between the forecasted future volatility of an asset and the implied volatility of options based on that asset. Because options pricing is determined by the volatility of the underlying asset, if the forecasted and implied volatilities differ, there will be a discrepancy between the expected price of the option and its actual market price.
BREAKING DOWN 'Volatility Arbitrage'
A volatility arbitrage strategy is generally implemented through a delta neutral portfolio consisting of an option and its underlying asset. A long position in an option combined with a short position in the underlying asset is equivalent to a long volatility position. This strategy will be profitable if the realized volatility on the underlying asset eventually proves to be higher than the implied volatility on the option when the trade was initiated. Conversely, a short position in an option combined with a long position in the underlying asset is equivalent to a short volatility position, which will be profitable if the realized volatility on the underlying asset is ultimately lower than the option's implied volatility.

Implied Volatility  IV
The estimated volatility of a security's price. 
Vega
The measurement of an option's sensitivity to changes in the ... 
Volatility Smile
A ushaped pattern that develops when an optionâ€™s implied volatility ... 
Option Premium
1. The income received by an investor who sells or "writes" an ... 
VIX Option
A type of nonequity option that uses the CBOE Volatility Index ... 
Volatility
1. A statistical measure of the dispersion of returns for a given ...

Trading
Implied Volatility: Buy Low And Sell High
This value is an essential ingredient in the option pricing recipe. 
Trading
What is Meant by Implied Volatility?
The estimated volatility of a security's price. 
Trading
Implied vs. Historical Volatility: The Main Differences
Discover the differences between historical and implied volatility, and how the two metrics can determine whether options sellers or buyers have the advantage. 
Trading
Understanding Vega
In options trading, vega represents the amount option prices are expected to change in response to a change in the underlying assetâ€™s implied volatility. 
Trading
Options Trading: How Implied Volatility Affects Calendar Spread
Even if the risk curves for a calendar spread look enticing, a trader needs to assess implied volatility for the options on the underlying security. 
Trading
Option PriceVolatility Relationship: Avoiding Negative Surprises
Learn about the pricevolatility dynamic and its dual effect on option positions. 
Trading
An Option Strategy for Trading Market Bottoms
The reverse calendar spreads offers a lowrisk trading setup that has profit potential in both directions. 
Trading
The Anatomy of Options
Find out how you can use the "Greeks" to guide your options trading strategy and help balance your portfolio. 
Trading
Ratio Writing: A HighVolatility Options Strategy
Selling a greater number of options than you buy profits from a decline back to average levels of implied volatility. 
Trading
How To Profit From Volatility
We explain four key strategies to profit fom volatility in markets.

How does implied volatility impact the pricing of options?
Learn about two specific volatility types associated with options and how implied volatility can impact the pricing of options. Read Answer >> 
What is an option's implied volatility and how is it calculated?
Learn what implied volatility is, how it is calculated using the BlackScholes option pricing model and how to use a simple ... Read Answer >> 
Can delta be used to calculate price volatility of an option?
Learn how implied volatility is an output of the BlackScholes option pricing formula, and learn about that option formula's ... Read Answer >> 
What is the relationship between implied volatility and the volatility skew?
Learn what the relationship is between implied volatility and the volatility skew, and see how implied volatility impacts ... Read Answer >> 
How is implied volatility for options impacted by a bearish market?
Learn why implied volatility for option prices increases during bear markets, and learn about the different models for pricing ... Read Answer >> 
How is implied volatility used in the BlackScholes formula?
Learn how implied volatility is used in the BlackScholes option pricing model, and understand the meaning of the volatility ... Read Answer >>