Volatility Arbitrage

Volatility arbitrage is a type of statistical arbitrage that seeks to take advantage of the difference between the implied volatility of an option and the volatility of the underlying asset. This strategy is generally implemented with a delta neutral portfolio, consisting of an option and its underlying asset. When a trader buys an option and sells its underlying asset, the position is said to be long volatility, i.e the trader is expecting the implied volatility to increase. Similarly, if a trader has a short position in an option and a long position in the underlying asset then the position is said to be short volatility, i.e the trader is expecting the implied volatility to decrease.