A professional trader said that the way is not to short VIX or other volatility products, but to short the difference between implied volatility and realized volatility of SPX This has to do with VRP Variance risk premium but what means selling the difference? The pro trader trades OTM bull put spreads in SPX. It is not clear to me. Thanks.
-
$\begingroup$ One way to profit from the difference would be to sell options and delta hedge them. If the realized turns out to be lower than the initial implied vol, you would make money (and vice versa). There are other more complicated ways also. $\endgroup$– nbbo2Feb 26, 2021 at 23:51
1 Answer
If implied volatility were always identical to realized volatility your average profit over many option trades would be exactly zero.
But in reality implied volatility most of the time is higher than realized volatility (at least in SPX). That is the same as saying Options market prices are most of the time higher than their fair value.
If something is more expensive than it's fair value you would try to sell it to make a profit. That's exactly what your professional trader does.