How to trade relative-value realised-volatility?

[Hank_S]

Hi everyone, as per the thread's title, I was wondering how one could trade realised-vol in a relative-value setup.

I heard someone describe an approach where they predict the short term realised-vol ratio, say for example between SPY and QQQ. Short term could be 1-day, 3-days, one week into the future.

Based on the prediction they take the appropriate positions. Apparently this being a high sharpe ratio strategy.

I get how one could trade relative value implied vol. How could one do the same for realised vol?

Thanks in advance.

 

[MarkBrown]

so if you can do this you can trade the outright contract.

i see where it helps with risk but as they say no risk no reward.

you are basically trading a spread that is based on predictive vol and will need to check position for readjusting.

don't get all wrapped up in the fancy words. you're basically long one short the other. with the need to periodically adjust the position.

i would set up a stop loss based on. some standard deviation variance of the ratio.

btw i think it's worthwhile idea.

 

[2rosy]

otc variance

 

[Hank_S]

otc variance

Thank you. Do you mean as in OTC short term realised var swaps?

 

[2rosy]

Thank you. Do you mean as in OTC short term realised var swaps?

well, otc var swaps. can be long or short term. probably easier just bet someone. put money in an escrow that releases upon maturity and realized vol. can be done through smart contract on chain (woohoo, a use case for crypto )

 

[Sekiyo]

You can use options (Straddles)
You can use variance swap.
You can use ETFs (VXX, VXN).

 

[Hank_S]

well, otc var swaps. can be long or short term. probably easier just bet someone. put money in an escrow that releases upon maturity and realized vol. can be done through smart contract on chain (woohoo, a use case for crypto )

Thank you

 

[Hank_S]

You can use options (Straddles)
You can use variance swap.
You can use ETFs (VXX, VXN).

Thank you for your reply. Can you please provide an example of how you can use the mentioned ETFs and straddles to trade realised-vol (not implied) spreads?

 

[newwurldmn]

well, otc var swaps. can be long or short term. probably easier just bet someone. put money in an escrow that releases upon maturity and realized vol. can be done through smart contract on chain (woohoo, a use case for crypto )

that’s basically what a varswap is. It’s just a piece of paper with a math formula and two signatures on it.

 

[Sekiyo]

Thank you for your reply. Can you please provide an example of how you can use the mentioned ETFs and straddles to trade realised-vol (not implied) spreads?

If you think SPY realized vol > QQQ realized vol then you might buy an ATM straddle on SPY (profit from realized vol) and sell an ATM straddle on QQQ (to collect premium).

With ETFs … Buy VXX and short VXN. The profit comes if SPY’s volatility increases relative to QQQ’s.

Maybe I am wrong though