Seminar by Professor Philip Gray
- Topic: The Profitability of Volatility Spread Trading on ASX Equity Options
- Speaker: Professor Philip Gray, Professor of Finance, Department of Accounting and Finance, Monash University
- When: 14th September, 2012, (Fri)
If option traders make systematic errors in forecasting future volatility, options will be systematically mispriced. This may occur if the traders overweight recent information and therefore do not accurately anticipate the extent of mean reversion in volatility. This paper shows that the spread between a stock's long-term historical volatility and an option's implied volatility provides a strong signal of option mispricing. A hedge portfolio formed with long (short) straddles in options with high (low) volatility spreads generates average returns of nearly 18% per month. This finding, which is highly consistent with recent work in the US, suggests that the profitability of volatility spread trading on Australian equities is economically significant.