Like the world of the options markets, International Market Makers, or IMC, has changed immensely since it was founded in 1989. Trading has moved from the floor to screen, making the markets more technology driven. However, even though we have invested in automation and fast execution, modelling implied volatility is still at the heart of our business.
We’re an option market maker, which means we trade implied volatility. We aim to trade with theoretical credit and adjust our valuation to increase the chance of doing the other side of the trade, and either close, or hedge, the position. Because many of our trades are against well-informed participants who provide new information to the market, we see implied volatility drift against us over a longer period of time.
In liquid markets, you can find the other side of the trade quite quickly. In less liquid markets, or when trading large volumes, you can't expect to trade out of the position with a profit in a short time frame. These strategies require a longer holding time, and a longer exposure to risk, which is why understanding the fundamental price of volatility is so important.
There are various ways to increase the confidence in your volatility valuation. These range from fundamental analysis of a stock earnings history to statistically modelling realised movement, where products are traded relative to each other. These methods are well established, but we’re always looking for new angles and fresh insight in this vital area.
That’s why we invited an expert in volatility trading to give a presentation in our Amsterdam office. Colin Bennett’s book on volatility trading, Trading Volatility, Correlation, Term Structure and Skew, has been described as a bible on the subject – indeed, we have used it as a starting point for several of our trading strategies – so we were eager to gain his insight.
He discussed practicalities of volatility trading, speaking about event pricing, position management, relative value trading and linking theory to practice. Colin is an inspiring speaker and his stories sparked new ideas and creativity, which I expect to see come to fruition in the trading strategies we develop.
It’s sessions like the one run by Colin that pull together the things that make IMC great: the cutting-edge technology that shapes markets, the focus on option pricing that sets us apart, and the engaged people who look for smarter ways to make it all happen.