Equity volatility: Betting on turbulence
The researchers note that the Black-Scholes model was developed in the 1970s to price simple call and put options, and a key point of the model was that market makers could delta hedge – cancel out price movements in the underlying asset – their options positions to remove exposure to market direction.
The residual risk remaining in the portfolio was in the level of implied volatility exposure used to price the options.
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