What are volatility derivatives?
volatility derivatives are financial products where the volatility of the basic asset is a trading product. Volatility is the rate of change in price in the underlying asset, such as the financial index. A standard deviation is a volatility measurement. The derivative is a financial contract. The price of the contract is derived from the basic asset.
The payout of volatility derivatives depends on the volatility of the basic asset. A common example of volatility trading may be speculation about the future uncertainty of the main stock index. When the uncertainty increases, volatility increases and when the uncertainty decreases, it returns to the normal range. Volatility tends to remain high as the price of the asset drops. Declining prices tend to indicate growing volatility.
Many volatility derivatives are traded. Volatility -based products are available on indices and currencies. Trading in retail volatility is relatively new, but institutional deriivatives have been volatility for several years. For trading with volatility are kVolatility products available in the form of futures, options and funds traded on the stock exchange. Variance swaps on indices and individual stocks are known as scattering derivatives. These products may not be available to a retail trader. It is possible to map historical volatility and implicated volatility. Technical analysis techniques can be used to predict the future of realized volatility. This type of trading is referred to as spreading.
The purest way to trade volatility is swap volatility. It is a preliminary contract on the volatility of the underlying asset. Swaps volatility are commonly traded with currencies. Variance swaps are more commonly used for stocks. Variance swaps have a higher payout because the scatter is calculated as a square of standard deviations. Variance swaps can be used to expose volatility of the collateral.
volatility deriivity derivative can be constructed POmo vanilla delta. Different combinations of Delta shops can achieve volatility trade. Trade parameters are determined by the Greeks. Greeks measure sensitivity to movements to movements in the underlying asset. This type of volatility trading may not be cost -effective.
Investment in volatility derivatives requires a comprehensive knowledge of possibilities and other derivatives. The basic concept of volatility, expected volatility and volatility in advance must be fully understood before one trading in these highly complex derivatives. Educational resources are available online and through derivative brokers.