Taking the ETF event of ETH as an example, let's talk about the idea of ​​event-driven volatility arbitrage.

1-First of all, I would like to ask a question to the old options trader. What is the essence of volatility trading?

If you look at the books, you will see various types of volatility pricing formulas. The Black-Scholes model, the GARCH model, and the pricing method based on implied volatility are the three mainstream pricing methods.

These are important, but not the most important. What the textbooks will not teach you is that these models are based on the premise that supply and demand are sufficient.

Because supply and demand are unbalanced in reality, the essence of volatility trading is actually to balance mismatched supply and demand.

Whether you are a quantitative option trading fund or a veteran in bullish option trading, you are using your model to trade this supply and demand. In professional terms, it is the smooth surface model.

2-What is the underlying logic of event-driven volatility trading?

Now that the first particularly critical question mentioned above has been answered, let's talk about the underlying logic. In fact, it is to be the counterparty of the party with scarce liquidity supply. In fact, whether it is option trading, trading, or many things in life, it is not bad to learn a little bit of "Game Theory". Even if it is a long-term positive-sum game, there are many zero-sum or negative-sum games in the short and medium term.

3-How to do specific event-driven volatility arbitrage?

First, it is necessary to confirm the timetable of key events, and then a consensus of market expectations will be formed. As time approaches, the consensus will continue.

Next, there will be 3 possibilities for the development of events:

Situation ①, the event is implemented within expectations, and the consensus continues;

Situation ②, the time is approaching, the expectations are chaotic, and then the original expectations of the event are implemented, and the consensus continues;

Situation ③, the time is approaching, the expectations are chaotic, and then the event is implemented beyond expectations, forming a new consensus expectation.

The above 3 situations correspond to the following figure. I believe that the old drivers of options can understand event-driven volatility trading more clearly through this sorting.

Finally, this kind of topic belongs to the middle and high-level category of options. Ordinary option players will not know this and it will not affect your steady profit.

I will talk about this content in the second stage of the "Intermediate Course" of the options private training class for in-depth discussion with you.