What is 'Volatility Arbitrage'
Volatility arbitrage is a trading strategy that attempts to profit from the difference between the forecasted future pricevolatility of an asset, like a stock, and the implied volatility of options based on that asset.
BREAKING DOWN 'Volatility Arbitrage'
Because options pricing is affected 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.
A volatility arbitrage strategy can be implemented through a deltaneutral portfolio consisting of an option and its underlying asset. For example, if a trader thought a stock option was underpriced because implied volatility was too low, she may open a long call option combined with a short position in the underlying stock to profit from that forecast. If the price of the stock doesn't move, and the trader is correct about implied volatility rising, then the price of the option will rise.
Alternatively, if the trader believes that implied volatility is too high and will fall, then she may decide to open a long position in the stock and a short position in a put option. Assuming the stock's price doesn't move, the trader may profit as the option falls in value with a decline in implied volatility.
There are several assumptions a trader must make, which will increase the complexity of a volatility arbitrage strategy. First, the investor must be right about whether implied volatility really is over or underpriced. Second, the investor must be correct about the amount of time it will take for the strategy to profit or time value erosion could outpace any potential gains. Finally, if the price of the underlying stock moves more quickly than expected the strategy will have to be adjusted, which may be expensive or impossible depending on market conditions.

Volatility Smile
A ushaped pattern that develops when an option’s implied volatility ... 
Arbitrage
Arbitrage is the purchase and sale of an asset at the same time ... 
Arbitrage Trading Program (ATP)
An arbitrage trading program (ATP) is a computer program that ... 
Conversion Arbitrage
An options trading strategy employed to exploit the inefficiencies ... 
Volatility Swap
Volatility swaps are forward contracts with a payoff based on ... 
TimeVarying Volatility
Fluctuations in volatility over time. Volatility is the standard ...

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
An Option Strategy for Trading Market Bottoms
A reverse calendar spread offers a lowrisk trading setup with profit potential in both directions. 
Trading
Options: Implied Volatility and Calendar Spread
Even if risk curves on a calendar spread look enticing, a trader needs to assess implied volatility. 
Investing
How Statistical Arbitrage Can Lead to Profits
Find out how statistical arbitrage is leveraged by traders and investors seeking profit by capitalizing on the relationship between price and liquidity. 
Trading
Strategies for Trading Volatility With Options (NFLX)
These five strategies are used by traders to capitalize on stocks or securities that exhibit high volatility. 
Trading
Stock Options: What's Price Got To Do With It?
A thorough understanding of risk is essential in options trading. So is knowing the factors that affect option price. 
Investing
Nvidia's Shares At Risk Of Falling 12%
Lofty Price: Nvidia's stock is entering a risky, volatile period for investors 
Trading
Understanding Option Pricing
This article will explore what factors you need to consider in the pricing of options when trying to take advantage of a stock price's movement.

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 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 >> 
How do I use the news to find arbitrage opportunities?
Learn what risk arbitrage trading is and how this type of arbitrage trading opportunity is available to individual retail ... Read Answer >> 
If the stock market is so volatile, why would I put money into it?
Learn how the up and down movement of price, known as volatility, can benefit shortterm investors and why longterm investors ... Read Answer >> 
How do I use software to make arbitrage trades?
Understand the meaning of arbitrage trading, and learn how traders employ software programs to detect arbitrage trade opportunities. Read Answer >>