Personal Finance & Money Asked on February 23, 2021
Is it true or just my misconception that pro traders trade volatility while retail readers try to predict stock direction (unsuccessfully most of the time).
What are the pros and cons of trading volatility (via options) and hedging all directional risk as opposed to betting on the directional move of a stock?
Can't totally agree with that.
Volatility trading is just one trading type of many. In my opinion it doesn't depend on whether you are a professional trader or not.
As you might have heard, retail traders are said to create 'noise' on the market, mainly due to the fact that they aren't professional in their majority. So, I would assume, if an average retail trader decided to trade volatility he would create as much noise as if would have been betting on stock directions.
Basically, most types of trading would require a considerable amount of effort spent on fundamental analysis of the underlying be it volatility or directional trading. Arbitrage trading would be an exception here, I guess. However, volatility trading relies more on trader's subjective expectations about future deviations, whereas trading stock directions requires deeper research of the underlying. Is it a drawback or an advantage? I.d.k.
On the other hand-side volatility trading strategies cover both upward and downward movements, but you can set similar hedging strategies when going short or long on stocks, isn't it?
To summarise, I think it is a matter of preference. Imagine yourself going long on S&P500 since 2009. Do you think there are many volatility traders who have outperformed that?
Answered by Andy on February 23, 2021
There are a plethora of ways to trade, including multiple ways to trade volatility so it's not a binary consideration.
"Retail readers" confuses me so I'm not sure whether you are comparing heding with directional stock traders or directional investors. Therefore, I'll just offer that the trader hedging all directional risk is playing in the middle, grinding out income eliminating the tails. IOW, he doesn't participate in large up or down moves in the single issues or in the market.
Answered by Bob Baerker on February 23, 2021
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