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IVolatility Egar Service
- Thread starter Watson
- Start date
IV_Trader
You are short dispersion / long correlation and you have correlated everything +1 in your spreadsheet example. In that case, whichever direction the market takes, providing everything correlates you - canât lose !
Now for the bad news, if stocks disperse;
In Column G try one stock up 3%, one stock down 3%, one stock up 3% and so on. That will produce an intrinsic payout of -$ 36,793 on the components, but what we donât know (at least I donât not being familiar with the DOW weights) is how that would affect the DOW index. In the scenario I've given you it maybe that the DOW would close higher than when you opened, in which case you'd be looking at a substantial loss.
Because you havenât weighted the trade properly and have thus disregarded exposure the whole spread is a nonsense. You are over exposed on some stocks and under exposed on others. I only hope yours is a paper trade rather than for real.
I also donât understand the logic of your latest installment where you leg up a strike on a short (GM) Put because itâs gone OTM or close both GM Puts and representing DOW Puts. Why not just leave it alone ?
How do you calculate the number of DOW puts to close ?
Lots of questions again, but I'm trying to understand this strategy and in the nicest possible way, you ain't helping.
You are short dispersion / long correlation and you have correlated everything +1 in your spreadsheet example. In that case, whichever direction the market takes, providing everything correlates you - canât lose !
Now for the bad news, if stocks disperse;
In Column G try one stock up 3%, one stock down 3%, one stock up 3% and so on. That will produce an intrinsic payout of -$ 36,793 on the components, but what we donât know (at least I donât not being familiar with the DOW weights) is how that would affect the DOW index. In the scenario I've given you it maybe that the DOW would close higher than when you opened, in which case you'd be looking at a substantial loss.
Because you havenât weighted the trade properly and have thus disregarded exposure the whole spread is a nonsense. You are over exposed on some stocks and under exposed on others. I only hope yours is a paper trade rather than for real.
I also donât understand the logic of your latest installment where you leg up a strike on a short (GM) Put because itâs gone OTM or close both GM Puts and representing DOW Puts. Why not just leave it alone ?
How do you calculate the number of DOW puts to close ?
Lots of questions again, but I'm trying to understand this strategy and in the nicest possible way, you ain't helping.
Quote from Profitaker:
IV_Trader
You are short dispersion / long correlation and you have correlated everything +1 in your spreadsheet example. In that case, whichever direction the market takes, providing everything correlates you - canât lose !
Now for the bad news, if stocks disperse;
In Column G try one stock up 3%, one stock down 3%, one stock up 3% and so on. That will produce an intrinsic payout of -$ 36,793 on the components, but what we donât know (at least I donât not being familiar with the DOW weights) is how that would affect the DOW index. In the scenario I've given you it maybe that the DOW would close higher than when you opened, in which case you'd be looking at a substantial loss.
Because you havenât weighted the trade properly and have thus disregarded exposure the whole spread is a nonsense. You are over exposed on some stocks and under exposed on others. I only hope yours is a paper trade rather than for real.
I also donât understand the logic of your latest installment where you leg up a strike on a short (GM) Put because itâs gone OTM or close both GM Puts and representing DOW Puts. Why not just leave it alone ?
How do you calculate the number of DOW puts to close ?
Lots of questions again, but I'm trying to understand this strategy and in the nicest possible way, you ain't helping.
of course I will lose money if half of the stocks goes up and another goes down. Show me ANY dispersion position and I will find similar scenario for possible loss.
Which brings me back to my point some time ago;Quote from IV_Trader:
of course I will lose money if half of the stocks goes up and another goes down. Show me ANY dispersion position and I will find similar scenario for possible loss.
Quote from Profitaker:
I'm not quite sure what you're trying to illustrate with the spreadsheet ?
Quote from Profitaker:
Which brings me back to my point some time ago;
this was a test of initial position , to check the "best case scenario" expected vs. actual (regardless of delta imbalance).
You could of check how DOW correlated with components long time ago (by yourself) . There is no point to discuss anything else until you agree how it's does. It's very simple (price weighted).
I know this is not the best month to enter reverse ( to many stocks reporting) .
In your âbest case scenarioâ where everything (including the index) drops 3% then yes, you can forget balancing, there is no need - just sell everything in the same quantity as you have done and you cannot lose, proving every single stock drops by the same %.Quote from IV_Trader:
this was a test of initial position , to check the "best case scenario" expected vs. actual (regardless of delta imbalance).
But in the real world stocks donât correlate like that, which is why index options have a lower IV than the component options â the index as a whole is less volatile than the components due to dispersion, i.e. one stock rises another falls and the net effect cancels out, so that the index remains stationery.
The other point (again) is that you havenât considered component weighting in the index. For example, IBM dropping by 5% will cause a much larger drop on the index than by GM dropping 5% and yet you still sell the same exposure on both stocks. This is fundamentally wrong, except of course in your âbest case scenarioâ.
Just to give a practical example if;
IBM, MMM, MO, AIG, BA, JNJ, CAT, XOM, PG, UTX rose 2% and
AXP, C, WMT, HD, KO, DD, JPM, MCD, HON, GE stood still and
MRK, HPQ, VZ, AA, MSFT, DIS, PFE, T, INTC, GM fell 5%;
Then the DOW would be at 10,651 and you would lose $ 11,900.
Try it....
Then try balancing the portfolio $Delta and you'll find you would have made a $ 17,000 profit in the same scenario.
Big difference eh ?
a lot of adjustments so far...
Closed 10 winning positions (AXP , CAT , GM...) and sold corr 105 DIA puts for 15k profit (including loss on long DIA puts).
Opened new/higher strike on many of them with DIA long hedge of 107108 strikes.
Sold "free" calls on losing positions (MMM , JNJ)
Closed 10 winning positions (AXP , CAT , GM...) and sold corr 105 DIA puts for 15k profit (including loss on long DIA puts).
Opened new/higher strike on many of them with DIA long hedge of 107108 strikes.
Sold "free" calls on losing positions (MMM , JNJ)
Hello All,
I am new to trading and trying to understand dispersion trading.
Here is my question and small discussion,
http://www.elitetrader.com/et/index.php?conversations/dispersion.585070/
Could someone please help new comers in my threads.
I am new to trading and trying to understand dispersion trading.
Here is my question and small discussion,
http://www.elitetrader.com/et/index.php?conversations/dispersion.585070/
Could someone please help new comers in my threads.