Question

If a trader buys an option at an implied volatility of 10%, and plans to delta hedge it, over the life of the option she hopes realized volatility will be:

		higher than 10%
		lower than 10%
		if its three month option then she hopes its 10/3
		irrelevant where realized will be

Answer 1

If a trader buys an option at implied volatility of 10% and she is delta hedging it,it will always mean that she wants the momentum of the stock to go down and the volatility of the stocks should also go down in order to gain from the relevant position of delta hedging.

she would want that implied volatility of related stocks should always go down so that she would always gain from lowering of implied volatility. She would want implied volatility to go lower than 10%.

She would not want volatility of higher than 10% because she would lose in such scenario.

Correct answer is option B) lower than 10%