What's Influencing Volatility Pricing?

By Lawrence G. McMillan

With so many volatility derivatives and products available for trading now, a debate has arisen as to what is influencing their pricing.  Is it actual volatility expectations, or is it supply and demand – or possibly something else altogether?  It is important to understand these relationships for several reasons, the most obvious of whish is that it can help one to construct theoretically profitable trades.  In this article, we will be examining, in detail, the strategies that are best suited to profit from these unusual volatility constructs.  In addition, an understanding of what’s influencing volatility can help one understand if the “tail is wagging the dog.”  That is, are the ETN buyers influencing all of the other derivatives, including even $SPX puts?

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