How to structure trade for inverse indices

Quote from HFStartup:

Your second suggestion of buy/writes is also worth consideration, although, like you said, it is capital intensive.
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It's only capital intensive when the strategy fails. CC's are equal to NP's and they have low initial margin requirements. But as I mentioned in my previous reply, not a good approach.
 
How about trading an option on one index and delta hedging with the other index. You will be taking the vol view that you want and given the high correlation should remain "delta neutral" while accumulating additional alpha from the mean reversion.

Suppose index A is -2% and index B is +2%
Sell a call on index B and buy stock delta neutral on index A.

Monetize the gamma/theta of index B while making 4% on your delta size from the mean reversion.
 
Quote from HFStartup:

Given these conditions and the comments posted, I find my attention being drawn to straddles. To be specific, selling a straddle on the declining index and buying a straddle on the inclining index. I would do this in a ratio, perhaps selling twice as many options as I would buy if needed to produce a net credit. The net short aspect of this strategy (if it exists) would allow me to take advantage of the time decay, provide a method to capitailize from the statistical fact that markets tend to decline faster than they rise, and provide some degree of hedging.
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Your primary concern is direction, not volatility which is gravy.

Long straddles are tough enough to profit with. Buying one on one index and selling on another is going to hammer you if you get direction. An IV contraction may soften the blow.

It's a bit of work but I'd look at your historical A-B extremes and backtest whatever option strategy amuses you. Ignore the IV component initially. You have to capture the directional movement of A-B not be hurt by it. AFAIK, selling naked straddles on one index and buying them on another seems to defy that. Backtesting will answer a lot of questions.
 
Quote from newwurldmn:

How about trading an option on one index and delta hedging with the other index. You will be taking the vol view that you want and given the high correlation should remain "delta neutral" while accumulating additional alpha from the mean reversion.

Suppose index A is -2% and index B is +2%
Sell a call on index B and buy stock delta neutral on index A.

Monetize the gamma/theta of index B while making 4% on your delta size from the mean reversion.
More...

You should look at these trades $ delta neutral, rather than delta neutral. They move in inverse percentages. If they are not adjusted daily to be $ delta neutral, the next day you'll be off and have a higher margin requirement.
 
Quote from rmorse:

You should look at these trades $ delta neutral, rather than delta neutral. They move in inverse percentages. If they are not adjusted daily to be $ delta neutral, the next day you'll be off and have a higher margin requirement.
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Yeah. I was talking in Dollar Delta terms but I hadn't made that clear.
 
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