Study on the Validity of Volatility Trading

This study examines the role of volatility mean reversion in option pricing and evaluates the performance of commonly used volatility estimators within a broad market context. Using a comprehensive dataset of end-of-day option chains for the 100 most actively traded U.S. equities from 2018 to 2023, we apply several established statistical techniques—including unit root tests, variance ratio analysis, Hurst exponent estimation, and GARCH modeling—to quantify the presence and strength of mean reversion in volatility. To assess the accuracy and practical usability of volatility metrics for option valuation, we compare realized volatility, GARCH-based forecasts, range-based estimators, and widely used implied volatility measures such as the VIX and daily implied volatility averages, benchmarking each against contract-specific implied volatility. The results indicate that more than 65% of the analyzed tickers exhibit statistically significant mean-reverting behavior, and that the 30-day average implied volatility consistently provides the most reliable predictive performance among the tested metrics, while range-based estimators perform poorly when applied to end-of-day data. Finally, backtests of six delta-neutral option strategies informed by these findings did not yield consistent profitability or statistically significant outperformance, suggesting that although volatility mean reversion is measurable, its direct application to systematic trading remains challenging.

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Publication Details

Journal
FinTech
Published
2026-03-20
DOI
https://doi.org/10.3390/fintech5010026
Primary Topic
Stochastic processes and financial applications
Type
article
Field-Weighted Citation Impact
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article

Study on the Validity of Volatility Trading

José Manuel Mira McWilliams, Alberto Castillo
FinTech
Stochastic processes and financial applications
article

Study on the Validity of Volatility Trading

José Manuel Mira McWilliams, Alberto Castillo
article en

Abstract

This study examines the role of volatility mean reversion in option pricing and evaluates the performance of commonly used volatility estimators within a broad market context. Using a comprehensive dataset of end-of-day option chains for the 100 most actively traded U.S. equities from 2018 to 2023, we apply several established statistical techniques—including unit root tests, variance ratio analysis, Hurst exponent estimation, and GARCH modeling—to quantify the presence and strength of mean reversion in volatility. To assess the accuracy and practical usability of volatility metrics for option valuation, we compare realized volatility, GARCH-based forecasts, range-based estimators, and widely used implied volatility measures such as the VIX and daily implied volatility averages, benchmarking each against contract-specific implied volatility. The results indicate that more than 65% of the analyzed tickers exhibit statistically significant mean-reverting behavior, and that the 30-day average implied volatility consistently provides the most reliable predictive performance among the tested metrics, while range-based estimators perform poorly when applied to end-of-day data. Finally, backtests of six delta-neutral option strategies informed by these findings did not yield consistent profitability or statistically significant outperformance, suggesting that although volatility mean reversion is measurable, its direct application to systematic trading remains challenging.

FinTechVol. 5(1)
Universidad Politécnica de Madrid (ES)
Openalex Percentile: Top 13%
Stochastic processes and financial applications
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