When the volatility is large, traditional financial instruments such as stocks and futures can only be short, but when there are predictable fluctuations, we can use some financial instruments to make the stock market fluctuate, so as to obtain the benefits brought by the increase of volatility. This financial instrument is the stock index option.
How to use stock index options to make the volatility of multiple stock indexes? We need to build a portfolio of cross-market arbitrage of options, that is, buy call options and sell the same number of put options at the same time, and the former has the same maturity time and exercise price. We all know that the price of options is mainly influenced by intrinsic value, time value and volatility, among which volatility is directly proportional to the option price. The fluctuation of call options and put options in this portfolio can offset the gains and losses caused by the fluctuation of underlying assets, while short-term buying and using this portfolio can avoid the impact of time value decay, so the main factor affecting options is volatility. As long as the volatility of the underlying assets rises, this portfolio can generate income.
Why is the higher the volatility, the higher the option price? We can understand it as compensation for the option seller. Because when the volatility of the underlying assets is high, the buyer will have more profit space because of its linear income, while the seller can only get risk compensation by raising the option price because of its limited income.