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Volatility
Details about the market.
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Explanation
In this arena traders/teams are able to bet on the underlying volatility of a share/index/currency etc by going Long or Short on the current level. Contracts can be set for a range of periods from relatively short term, 5 days to in excess of 20+ days.
How does the contract work?
For example: Trader A sees the volatility for company ABC Ltd is 27.4%, he thinks the volatility will increase, so buys long 5 days at £20,000 per point. After five days however the volatility has dropped to 25.4% a 2% decline. The trader has lost: 2% * £20,000 = £40,000
Mitigation
It is worth remembering however that if a trader buys a long term contract for say 20 days and after 15 days the market is turning against them, they can “hedge” the outcome by buying a short term contract on the same vehicle in the opposite direction to try and limit their exposure. For example: Trader A buys a 20 day contract long on ABC Ltd at 27.4% at £20,000 per point. After 15 days the volatility has tumbled to 23.4%, the trader is down 4% or £80,000. To limit the loss the trader buys a 5 day contract and shorts ABC Ltd at £20,000 per point. Both contracts expire and the volatility has fallen further to 22.4% On the first contract the trader is down: 27.4% - 22.4% *£20,000 = £100,000 On the second contract the trader is up: 23.4% - 22.4% * £20,000 = £20,000 The net loss is reduced to £80,000.
Margin payment
When a trader goes to put a trade through they will face a margin payment. This is the brokers security and consists of five times the £ per point. For example: Trader A wants to wager £50,000 per point then they will be asked for £250,000 as margin. This amount is taken from the trader’s bank balance and held on account. At the end of the contract the margin is used to pay off any loss with additional amounts drawn from the trader’s bank balance. Should the trader’s bet have been successful they will receive the margin back along with their profit.
Delistings
If a company is de-listed whilst a trader has an existing volatility contract running on it, the contract is declared null and void. Any company which is delisted will not be re-listed on the volatility trading screen for a ten day period.
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