By Mike Duncan | April 2026
Buying, Selling, and Mispricing It
The mistake most institutional option users make before they even place a trade
Most institutions treat volatility as background noise. A number that describes how much a portfolio moves. That framing is expensive.
When you buy an option, you are buying volatility. When you sell one, you are selling it. The direction of the underlying is secondary. The real question is whether the volatility embedded in the option price is a fair estimate of what will actually happen. If it is too high, the seller wins. If it is too low, the buyer wins. Every option trade is ultimately a bet on that gap.
Most institutional option programmes operate without a clear view on whether the volatility they are buying or selling is fairly priced. That indifference compounds over time. The difference between buying expensive volatility and cheap volatility, repeated across a portfolio and across years, is the difference between a hedge programme that works and one that steadily drains capital.
What this paper argues
Volatility is not just a risk metric. It is a tradable asset with its own supply and demand dynamics, term structure, skew, and regime cycle. It can be cheap or expensive, and those conditions are identifiable. Deploying options without a view on vol pricing is like buying bonds without a view on whether yields are fair.
The volatility risk premium is real and persistent, but it is not free money. It is compensation for tail risk. It is collected steadily until it is violently given back. Understanding that shape, not just the average return, is what separates a governed short vol programme from a disaster waiting to happen.
What it covers
- The volatility risk premium: what it is, why it exists, and why the carry looks attractive until it suddenly is not
- Realised versus implied volatility, and why the gap between them is the trade in every option position
- The term structure of volatility: what normal, stressed, and transitional curves tell you about market structure
- Why short-dated and long-dated options are different instruments that respond to different forces
- Skew: why downside puts are structurally more expensive, and what that tells you about the real cost of protection
- The four volatility regimes and why deploying options without a regime view is trading blind
- Five questions every portfolio manager should answer before buying or selling volatility
- How to size option positions to the vol environment, not just the strategy
- The role of a volatility framework in running a disciplined convexity budget
- Five institutional failure modes: reactive buying, short-dating, treating premium as cost, selling vol without owning the tail, and ignoring cross-asset signals
The central argument
The question is not whether to buy volatility. It is whether the price, the regime, and the portfolio objective justify it. That question requires a framework. Most institutions do not have one.
Read the practitioner paper
Volatility as an Asset – Buying, Selling, and Mispricing It
