What exactly is a "relative value volatility arbitrage fund"?

Wow. Well, volatility arbitrage trading is all about predicting the volatility of a stock option. Volatility arbitrage traders try to buy volatility when it is high and trade it when it is low, taking profit off the difference.(Options with low volatility are worth more.) What does all that mean, exactly?

Volatility refers to how wildly the price of a stock fluctuates over time. So if a stock is a dollar one hour, fifty dollars the next, then a penny for one minute, then $500, then $5,000, then $2, that would be a very volatile stock, because its value changes a lot and all the time.(This is just a hypothetical example, not a real case--it isn't even about stocks exactly but rather stock options--which are more abstract than actual stocks--I'm just explaining what volatility is by using something concrete here.) On the other hand, a stock that hovers more or less between $49 and $50 ninety percent of the time would be said to have low volatility. A highly volatile stock that becomes less volatile increases in value, because people don't really want stocks that change price wildly up and down.

Options are the right to trade stocks, not the stocks themselves--so it's all pretty out there, this stuff. Anyway, volatility arbitrage traders buy the crazy wild volatile options cheap then sell them when they get more stable (that is, less volatile), and make their money on the trade of the stable options. That's the plan anyway.

Put a bunch of that kind of activity together in a fund package and you've got your "relative volatility arbitrage fund." I hope that made any sense at all. Basically it's a fairly risky business.

It's not something you'd gravitate toward to replace your passbook savings account or your 401k.It's something you'd involve yourself in if you could afford to burn money instead of oil. Come to think of it, if things keep going as they are, we all might be burning money instead of oil pretty soon. Good luck!

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