Opportunities in Arbitration of Derivatives Volatility: Risk Management and Control

Objective: This paper explores volatility arbitrage opportunities with derivatives transactions – discussing and creating models that manage transactions – while keeping operational risk under constant supervision and control. Theoretical Framework: The main concepts and theories that underpin the research – related to derivatives, behavioral finance and volatility – are presented to support and facilitate understanding of the research context. Method: To this end, a sample consisting of 63 transactions related to companies listed on North American stock exchanges between May and September 2023 is used. The analysis is performed by generating and observing volatility graphs, from the Professional Trading Platform of Interactive Brokers, one of the main and largest stock brokerage firms in the world. Based on the analysis of the volatility curve graphs, each transaction has its risk management methodology duly discussed. Results and Discussion: Among the main results, it is worth highlighting that the implied volatility arbitrage model for options proved to be efficient and profitable in the management of an investment portfolio, generating high profitability on the capital used as margin for operations. Research implications: It is concluded that the volatility arbitrage model, together with risk management systems, proves to be profitable for an investment portfolio in the long term. Originality/Value: This work contributes in a practical way to the study of volatility arbitrage operations and presents a profitable investment alternative that keeps risks under control.