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That's nice but it would help if we knew your position. Did you really buy the stocks and sell ITM calls, and if so why did you not just sell puts? How far ITM(calls) or OTM(puts) are your options? Did you do this for a credit or debit?

Thanks Neo. If only we had a mathematician here to decipher the code. The 2 scenarios from this article (attached) are much more realistic than the simple example discussed thus far. The problem with these specific scenarios, however, is that the results do not match the graphs. For...

Dantes, dispersion is not usually done for 3 months. It is done for expiration cycles or 1 month. The probability of a $50 stock vol 10% moving 5 points in 3 months is less than 3%. The probability for 1 month is .1%. So multiply .001 x .001 (for 2 stocks) and multiply that result by the...

This is an update of the post showing the historical relationship between index and component volatility. For the Dow, the weighted implied volatility of the component stocks (WtdCompIV) is now 19.3%. The actual IV of the index (DIA) is 9.9%. One month ago the WtdCompIV was 22.8%, while...

You agree with who? Nobody has said that. Think about this again. You ALWAYS hedge. Correlation merely refines the hedge which is first of all and primarily based on volatility. It doesn't matter whether it is regular dispersion or reversed dispersion -- it is always the stocks vs. the...

Another reverse dispersion post. You need to clarify because I can't believe you spent all that money to buy the stocks. If you did, essentially you are short OTM component puts and long index puts, which I assume are also OTM. So then the question is whether or not you did this for a...

It has been made clear from the beginning that there are two types of dispersion trading -- regular and reversed. The reverse dispersion is usually not recommended or advisable, but because index options are now cheap and Profitaker wanted to look at it, we have been discussing it. There is a...

You asked whether he was hedged and he is. But the fact he is hedged does not mean he is has correlation risk. It is the partial replication that gives him that. But what other alternative would you propose? I'm not sure what you are talking about here (what "correlation between vols" means)...

With regard to the reverse dispersion strategy, one option authority says that it is generally not profitable to buy the index put options and sell the stock put options because of the volatility skew since 1987: "The false argument goes like this: since stock options trade for higher implied...

Because the difference between the component IV and the index IV is substantial, these ideas are worth taking a look at. Is the reverse dispersion really viable? What are the worst case scenarios that have occured recently and what are their causes? Perhaps a portfolio of short component IV...

Go back and read your post where you said outliers were killing you, or maybe that was IV_Trader. If you are short an ATM component straddle and that stock makes a 2 std. dev. move while the index stays the same, that is a big loser for your reverse dispersion. Yes. Totally agree. I went back...

Those are your own words from near the beginning. Outliers start ATM and disperse. You don't want that in the reverse dispersion. I don't follow you on the "therefore". Did you use correlation in the WtdCompIV formula or just a weighting of the comps IV? How are you calculating implied...

Still working on reverse dispersion even though you've been getting killed by the outliers? This may be the time for the reverse since index IV has now become cheap (see chart) The only thing to do is to model this. HV is for backtesting, but IV is needed also. Yes the skew curves sound...

SV = Statistical Volatility SV = HV IV is usually higher than SV (HV), especially for indexes. You buy and sell IV.

No. It depends on the relationship of IV to SV. IV on the index can still be expensive.

I had some old monthly data I was working with recently and thought you'd like to see how the historical volatility of the index compares with the weighted sum of the volatilities of its components, which in this case are the Dow stocks so they are already price weighted. I used the HV of the...

I have posted what Egar calls the following the main formula for dispersion. Taking the square root of both sides gives the volatility. Notice that correlation is in the formula, and I believe this to be the correlation of the IV of the components. The Egar goes on to say: "There are...

This is another attempt at a reverse dispersion. The index calls are cheap compared to the puts, but you are not hedging against puts. Even the index calls will be somewhat expensive compared to the index SV. You don't say what kind of equity calls these are and your reasoning for selling...

The reverse (or negative) skew of index options has been there since the crash of 87. The dispersion strategy we have discussed here so far involves ATM option straddles. McMillan has discussed a variant of the dispersion strategy whereby OTM index puts are sold and OTM puts of components are...

Thanks IV_Trader for putting numbers to these scenarios. I assume that the time period is about a month. What your scenarios are telling me if the index moves you lose (#1) and if it is stagnant you win (#2). I don't know what your main point is here regarding the distribution of the...