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Thanks. Wouldn't correlation need to be considered too ?

May I ask how you arrived at that figure ?

Stock 1) IV 25%, index weighting 20% Stock 2) IV 20%, index weighting 30% Stock 3) IV 20%, index weighting 25% Stock 4) IV 15%, index weighting 20% Stock 5) IV 35%, index weighting 5% In this theoretical index, where all options are ATM, how would you calculate the fair value for the...

I would have thought there would be correlation irrespective of direction, no ?

I don't have an example yet, I'm in the early days and it may amount to diddly squat. The reason I think it should work is because the vol smile of individual equity options is broadly symmetrical, whereas the composite index has a negative skew to the upside. This cannot be correct, and I'm...

I was thinking along the lines of shorting a representative basket of individual equity Calls, and hedging by going long the index Calls. My reasoning being that index Calls are cheap (realative to index Puts). Anyone have any experience here, comments, or suggestions ?

Why do index options have negative IV skew, whereas the component parts (individual equity options) don't ? Is there any way to trade this anomaly ?

Sorry, can help you there. But if anyone knows the answer to that question (with certainty) can they please let me know, so that I can make a fortune.

Index options are cash settled at expiry so.... Your account is credited with 50. Depends which months series you're talking about. Your account is credited with 50. Depends which months series you're talking about. Are you refering to the DAX per chance ?

I'm sure your broker would accept a blanket instruction not to automatically exercise, as keyser1 has suggested. Good luck.

On the subject of automatic exercise, read this horror story; http://www.elitetrader.com/vb/showthread.php?s=&threadid=51251&highlight=exercised+AND+IRA

Called away stock A, with stock B quite likely to be called. Depends how much time value is in the option.

Def Yes, thinking about the mechanics of it you're absolutely right. What I should have said was .... being exercised over ex-div date won't cost the short call writer a dividend. See Def's cahsflow above.

No, American style individual equity options traded on LIFFE - contract is to deliver the stock.... only.

Quote from Option Trader That's a new one on me. In the UK the contract is to deliver the stock, nothing else.

It's a question of leverage - OTM and near time has maximum leverage, ITM and far time minimum leverage. Just remember leverage is a two-way street ! There is no "best" strategy.

I also think the market is generally efficient. With all the human brains and computer power analysing and monitoring each option market, it's difficult to imagine otherwise. Where the long strike is lower than ATM. Or Bull verticals, where the Long strike is higher than ATM. Where the ratio...

Don’t see how that can be called “arbitrage”, it’s merely a disagreement between two parties as to how the underlying is distributed, and I don’t know of anyway to “lock” a profit on that basis. If you disagreed with the skew / smile then sell the expensive strikes and buy the cheap ?

Have you tried this crowd ? http://www.ivolatility.com/

Never really got into GARCH for the reasons I gave above so can't comment as to whether it's more relevant to indices than individual stocks. Perhaps others use it ? and care to comment ?