Active account management using volatility arbitrage

Details Active account management using volatility arbitrage Active account management using volatility arbitrage

2006-09-05

2006-09-05

Pwu, Jeffrey (Department: 3628)

Data processing: financial, business practice, management, or co

Automated electrical financial or business practice or...

Finance

C705S03600T, C705S037000

Reexamination Certificate

active

07103569

ABSTRACT:
Software and methodology for active account management using volatility arbitrage is described. The software and method of the invention identify differences between the volatility of an index and the volatilities of the constituents of that index, that is, the dispersion, and harvests or extracts those differences in the form of premiums. A method comprises establishing tracking baskets populated with component equities which satisfy prescribed criteria, such as possessing a high degree of correlation to the underlying index, a predetermined volatility differential relative to the underlying index, or both. The tracking basket is then dynamically hedged using options. In another aspect of the invention, methods and software are provided for the selection of options to dynamically hedge the trading basket.

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