A trader looks for options where the implied volatility, is either significantly lower than or higher than the forecast realized volatility , for the underlying. In the first case, the trader buys the option and hedges with the underlying to make a delta neutral portfolio. In the second case, the trader sells the option and then hedges the position. Over the holding period, the trader will realize a profit on the trade if the underlying's realized volatility is closer to his forecast than it is to the market's forecast (i.e. the implied volatility). The profit is extracted from the trade through the continuous re-hedging required to keep the portfolio delta-neutral. See also Delta neutral Hedge (finance) Implied volatility Option (finance) Statistical arbitrage Volatility (finance) Volatility smile References Arbitrage Derivatives (finance) Financial markets Options (finance)