Hiis there any model avaliable to make a fund which works on stock volatilty and what kind of data i need to look for making such kind of fund

What exactly do you mean by "works on volatility"?Do you mean a fund that is long or short of volatility?Such funds exist.

Such funds not only exist, but are quite common. Long vol funds got crushed last year. I also see long-short equity funds selling blocks of variance swaps, but who knows what model they're using.

long-short funds: i think their model is "when it's not volatile i don't make any money. so now that vol has gone down i will sell it..."actually that's a bit cruel - there are some really smart guys running equity long short out there.

ertswhile, May I ask you another question...what is your feeling on the current vol levels? (increasing since yesterday) but then the longer term for the year? Vol has come down a horrible way, and I will admit that I got crushed since the beginning of the year... what I find unbelievable is the level of stock index options vols in comparison to a "riskless" asset: bund option volsthks

ah yes - recent vol levls - a topic of many beers!my take on it is this: low interest rates have caused people to search for yield. yield hungry people only get yield one way: taking risk. a common way to take risk is to write options. this was discussed in depth on another thread, but there has been a huge amount of OTM stock call option writing by non-delta hedgers. the delta hedgers were buyers as vol got crushed and crushed. very many desks have been long of vol, and one lesson i have learned in my years of trading is to avoid very crowded trades. if everyone (meaning delta hedgers or dealers or hedge funds) has the same position, there is a big added risk in putting it on. that is because these players (unlike long-only stock funds) are leveraged, and will at some point have to exit the position if things go badly.imagine a big room with a small door totally packed with people. suddenly the lights go out and someone yells "it's a bomb! oh my god!" you get the point - getting out all at the same time will not be possible and many will be injured!people have written options also on FX and bonds, but in far less size. options on credit look too cheap to write (though the vols are fairly high compared to historical).we have been deallocated to vol trading, apart from the occasional dispersion trade, equity-credit trade, or my favourite trade, buying puts on realised variance.my view is that the combination of low interest rates and low vols is kind of like time itself slowing down (like in general relativity)! so things happen more and more slowly and when news comes out stocks go straight to their new level with no extra wiggling around, etc. as time goes more slowly, hedge fund returns get lower and clients ask them to step up the risk level so they can get more returns, or they arrange a leveraged account with the HF manager directly. you can see how stresses build up in this scenario. i don't expect signficant stock market vol increases until 2006. i do expect traders to keep buying and buying vol, thereby driving it lower and lower.

i am from pakistan and the only derivative instrument we have is the future on a particular nothing else, what i am asking actually is there a possiblity to make a fund which will base the its portfolio on volatility of a stocks and the only hedging instrument is in the market right now its future on stocks, our index is increase tremendously in last 2 years and its been very volatilite in last 7-8 months, it was 6218 point on dec end and now its 7850

so there is only a futures contract, and you want to create a fund that tracks the volatility of the market?hmm... options and futures can be used to create a variance swap .... futures and cash can be used to synthesize options ...the options are used to replicate a log(forward) contract, and the daily delta hedge maintains a stock position having constant currency value.the daily constant currency hedge thing is something like the delta hedge at zero vol of the log(forward), and replicating the options would be delta hedging the log(forward) at some non-zero vol. so i guess it doesn't all cancel out...somebody help us out here: could this work?

QuoteOriginally posted by: erstwhileah yes - recent vol levls - a topic of many beers!my take on it is this: low interest rates have caused people to search for yield. yield hungry people only get yield one way: taking risk. a common way to take risk is to write options. this was discussed in depth on another thread, but there has been a huge amount of OTM stock call option writing by non-delta hedgers. the delta hedgers were buyers as vol got crushed and crushed. very many desks have been long of vol, and one lesson i have learned in my years of trading is to avoid very crowded trades. if everyone (meaning delta hedgers or dealers or hedge funds) has the same position, there is a big added risk in putting it on. that is because these players (unlike long-only stock funds) are leveraged, and will at some point have to exit the position if things go badly.imagine a big room with a small door totally packed with people. suddenly the lights go out and someone yells "it's a bomb! oh my god!" you get the point - getting out all at the same time will not be possible and many will be injured!people have written options also on FX and bonds, but in far less size. options on credit look too cheap to write (though the vols are fairly high compared to historical).we have been deallocated to vol trading, apart from the occasional dispersion trade, equity-credit trade, or my favourite trade, buying puts on realised variance.my view is that the combination of low interest rates and low vols is kind of like time itself slowing down (like in general relativity)! so things happen more and more slowly and when news comes out stocks go straight to their new level with no extra wiggling around, etc. as time goes more slowly, hedge fund returns get lower and clients ask them to step up the risk level so they can get more returns, or they arrange a leveraged account with the HF manager directly. you can see how stresses build up in this scenario. i don't expect signficant stock market vol increases until 2006. i do expect traders to keep buying and buying vol, thereby driving it lower and lower.

erstwhile,I could not agree more about your statement on vols and herd instinct. You rock, man!