Page 1 of 1

Target Volatility Options -- explanation requested

Posted: September 12th, 2018, 11:39 am
by CommodityQuant
Do you know any really simple references on target volatility options in a real-world context?
There are lots of references online, but it's not clear to me what the payoff is.
In particular, if the payoff depends on a volatility, how do you convince the customer that the chosen volatility is correct?
Is the VIX index used?
I'm just very confused about the whole concept.
Or is it that the weighting of assets in a portfolio somehow depends on the "target" volatility?
This seems fraught with problems.  If the buyer of the option doesn't profit, I'd expect an argument about how the volatilities were assigned.
Unlike price, "volatility" can be computed in many different ways.
Feel free to reply with a URL -- none of the explanations I've seen are clear.  
Many thanks.

CommodityQuant

Re: Target Volatility Options -- explanation requested

Posted: September 12th, 2018, 3:50 pm
by EndOfTheWorld
do you mean timer options?

Re: Target Volatility Options -- explanation requested

Posted: September 12th, 2018, 8:35 pm
by CommodityQuant
EndOfTheWorld wrote:
do you mean timer options?

We called them vol target options, but they are often called target volatility options in the literature.
My job was to migrate them from one library to another.  I wasn't modelling them, and was just meant to implement the equations.
I had to do this quickly, so I didn't have time to understand the products analytically.
If I put "Target Volatility Options" on my CV/Resume, I invite questions on the topic.
CommodityQuant

Re: Target Volatility Options -- explanation requested

Posted: September 13th, 2018, 2:03 am
by bearish
I'm not up on the current state of affairs in this corner of the market, but if you care about the deep historical background, it can be found here: Portfolio Insurance.