Miller acknowledges that the volatility risk premium was lower over the five years ending 2018, but argues it’s more influenced by market regimes and cyclicality than structural dynamics. Her team forecasts the expected swings across a universe of options, looking across strikes and tenors to find the most attractive ones to both buy and sell.
For those who believe the short-vol trade is burning out, recent history offers some ideas. A simulated strategy of going long the contracts beat selling them from December 2017 through August 2019, IPS Strategic Capital found. Though long options trades come with plenty of their own risks, according to the quants at AQR Capital Management.
“You have to be exceptional at forecasting both the magnitude and the timing of large volatility increases, to simply not lose money on average,” they said in a recent paper.
This article provided by Bloomberg News.