Making volatility work for you

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Making volatility work for you Powered By Docstoc
					Maki
				
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Description: Equity volatility short positions are employed mainly in the index space, rather than on single stocks. This strategy tends to be more profitable because, empirically, index volatility often appears to be more expensive. When looking at the attractiveness of short volatility positions for three different markets, the Dow Jones Industrial Average, the Euro Stoxx 50 and the Hang Seng index, a comparison of implied volatility versus subsequently realized volatility shows that the Hang Seng offers the best opportunities. The difference of short-term implied to realized volatility since 2008 for the Hang Seng index displays the greatest overvaluation of around two volatility points on average. The advantage of a dispersion strategy over a simple volatility short strategy is that it is neutral to volatility valuation so that the profit and loss depends only on the realized correlation. In contrast, even if the expectation of an overvalued correlation proves to be correct, the short volatility strategy can still lose money.
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