Buying Dow Calls, selling Dow components Calls

D

darp

I saw a reference to this, now can not find an article on the subject.

The concept is simple, the DIA options have lower IV than components and are of course highly correlated. So buy DIA calls and sell equal dollar value of stock in BA, etc Calls.

Has anyone tried this? Any thoughts on it?
 
It's usually done the other way. Sell index buy single stock components... think about it.
Say, if half the stocks move up (=volatility) and half the stocks move down (= volatility)... the index stays right where it is... (= no volatility). So that's basically the reason index IV is lower than components...

It's called volatility dispersion strategy...

Dispersion strat wouldn't work in trending market... so in that case you could do the opposite.

But as always, being short vega and short gamma on single stocks can be an account killer...
 
Thank you folks. Yes saw dispersion articles, and realized they were going the other way.

Maybe its bad idea. Was thinking of selling just the highest IV 15, but then again it could be the reason no one writes about it, it it does not work.
 
You can make money both ways, but the VIG from being long the components vs short the index at the right price is a lock profit over time. The reverse requires no "events" to make money or the opportunity to exit the basket at a profit.
 
sle said:
DIA dispersion/RD would be a tricky beast given the index calculation method. I've never looked at it, but I wonder if there is some bias to longer-dated implied correlation due to dollar weighted nature (i.e. when a particular stock goes down and it's vol goes up, it's share in the index decreases).
More...
Yes, I imagine that one has to be careful with these... At any rate, I woulda thought Dow, with all of its idiosyncrasies, isn't a prime candidate for these strategies in the first place.
 
Martinghoul said:
Yes, I imagine that one has to be careful with these... At any rate, I woulda thought Dow, with all of its idiosyncrasies, isn't a prime candidate for these strategies in the first place.
More...

Especially since the fundamental reason for dispersion risk premium to exist is that the ss is undervalued due to buywriting and the index is overvalued due to protection buying.

Most index protection is bought in the SPX not in the DOW
 
You must log in or register to reply here.
Back
Top