Short volatility

A trading strategy based on selling short options that have a high implied volatility (i.e., expensive and with a high option value). Normally, the strategy is hedged by buying the underlying shares to secure the arbitrage profits over time. This assumes the actual volatility is lower than the implied volatility; it also requires continuous pricing and if the market gaps owing to periods of illiquidity, it becomes impossible to hedge perfectly. In either case significant losses may be incurred.

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