Unveiling the Hidden Risks of Option Trading: A Game Changer!
The prices of index options change over time, leading to volatility risk in option portfolios. By analyzing option prices on the SP500 and FTSE indices, researchers found that the implied volatility surface fluctuates randomly due to a few key factors. They developed a model that improves how traders update implied volatilities, showing that volatility risk can be broken down into identifiable factors. This approach helps justify the use of Vegas for measuring volatility risk.