Exploiting the Gap Between Implied and Realized Volatility

We develop an options trading strategy that takes advantage of the fact that options' implied volatilities tend to be higher than their realized volatilities. Therefore, we dynamically adjust the strike prices of the options included in the strategy to accurate Value-at-Risk forecasts. We implement a comprehensive set of Value-at-Risk forecasting models and show in a real world backtest the profitability of our strategy even after accounting for various trading frictions.