Cheers.
Surely any an implied correlation approaching +1 has got to be a good risk ?
IVolatility Egar Service
- Thread starter Watson
- Start date
Surely any an implied correlation approaching +1 has got to be a good risk ?
What exactly do you mean by âlocking Volsâ ? Are you implying they could be profitable if they did it right ?
Not sure what you mean here; do you mean the Index Vol vs Component Vol has a moderate amount of variance which could be exploited ? Or are you talking about the bid/offer spread of the components ?
Any views / tips / pointers with regards to running a reverse dispersion trade.
Lots of questions - thanks again.
Hello ?
Quote from Profitaker:
What exactly do you mean by âlocking Volsâ ? Are you implying they could be profitable if they did it right ?
Miscues in correlation and the lack of marks to the actual bid/offer vols being traded in index/comp.
Not sure what you mean here; do you mean the Index Vol vs Component Vol has a moderate amount of variance which could be exploited ? Or are you talking about the bid/offer spread of the components ?
bid/offer spread on component vols.
Any views / tips / pointers with regards to running a reverse dispersion trade?
+dispersion: Cover opposing[delta position] outlier-component straddles and buy the neutral straddle to replace/match correlation. Your long ABC comp straddle is trading 80d with your XYZ comp straddle trading -80d; cover opposing deltas and go long neutral straddles in both. The +80/-80d straddles were initally neutral-delta. You're simply rolling into the current neutral straddle to bank the +disp, component gains. It's not maintaining a pure-corr, but it's analogous to scalping long gamma. Trade narrow index markets like the dow.
-dispersion: Trade into law of large numbers; as many index components as you're able to muster; avoid narrow index markets. With -dispersion you can be sloppy on execution and still make bank provided you're diversified in buying the replication[box] volatility.
What exactly do you mean by âlocking Volsâ ? Are you implying they could be profitable if they did it right ?
Miscues in correlation and the lack of marks to the actual bid/offer vols being traded in index/comp.
Not sure what you mean here; do you mean the Index Vol vs Component Vol has a moderate amount of variance which could be exploited ? Or are you talking about the bid/offer spread of the components ?
bid/offer spread on component vols.
Any views / tips / pointers with regards to running a reverse dispersion trade?
+dispersion: Cover opposing[delta position] outlier-component straddles and buy the neutral straddle to replace/match correlation. Your long ABC comp straddle is trading 80d with your XYZ comp straddle trading -80d; cover opposing deltas and go long neutral straddles in both. The +80/-80d straddles were initally neutral-delta. You're simply rolling into the current neutral straddle to bank the +disp, component gains. It's not maintaining a pure-corr, but it's analogous to scalping long gamma. Trade narrow index markets like the dow.
-dispersion: Trade into law of large numbers; as many index components as you're able to muster; avoid narrow index markets. With -dispersion you can be sloppy on execution and still make bank provided you're diversified in buying the replication[box] volatility.
Riskarb
It'll take me a week to digest that lot above.
Thanks again.
It'll take me a week to digest that lot above.
Thanks again.
Risk
Just a quick one if I may....
Why is there so little written material on this strategy ? is it the domain of hedge funds only ? Closly guarded secret etc ?
Just a quick one if I may....
Why is there so little written material on this strategy ? is it the domain of hedge funds only ? Closly guarded secret etc ?
I really don't know. Initially, I think there were large $$ being made with an arbitrage with a low barrier to entry. It made sense not to crap where you eat. Now I simply think it's played-out and fully-vetted... it's not esoteric enough to write journal articles. It would be akin to writing a paper about conversions.
It's really the domain of Susq and GS(HTC), and has been since inception. I am sure they're locking a 99.7xx correlation and making a few hundred basis over tbill.
What is more important when selecting components for the PARTIAL replication ?
1. Component's IV/HV ratio or
2. Component's correl with Index
According to Egar , currently MO has IV/HV of 1.17 (meaning that potential stock's move will NOT cover the premium) , but it's also has a very low (16.5) correl with Index ( good odds to move in deferent that Index's direction ).
Using the same logic , looks like the best candidate to exclude this month is AIG (IV/HV is 1.22 and corell=82)
Thoughts?
1. Component's IV/HV ratio or
2. Component's correl with Index
According to Egar , currently MO has IV/HV of 1.17 (meaning that potential stock's move will NOT cover the premium) , but it's also has a very low (16.5) correl with Index ( good odds to move in deferent that Index's direction ).
Using the same logic , looks like the best candidate to exclude this month is AIG (IV/HV is 1.22 and corell=82)
Thoughts?