Long OTM call calendars hedge

[312]

Using long OTM call calendars on equity indices to increase diversification in a net long equities portfolio.

To clarify: increase diversification in terms of long vol during a crash, not in terms of adding names to the portfolio through the spreads.

Is this an efficient way to carry a long vol position intended as a hedge? As opposed to, say, long straddles? What is the downside? What's a better alternative (including correlation-based hedges instead of vol-based)?

Thanks

 

[Robert Morse]

Using long OTM call calendars on equity indices to increase diversification in a net long equities portfolio.

To clarify: increase diversification in terms of long vol during a crash, not in terms of adding names to the portfolio through the spreads.

Is this an efficient way to carry a long vol position intended as a hedge? As opposed to, say, long straddles? What is the downside? What's a better alternative (including correlation-based hedges instead of vol-based)?

Thanks

This type of spread would lose money in a market that moves away from the long calendar strike. It has a long delta.

 

[312]

This type of spread would lose money in a market that moves away from the long calendar strike. It has a long delta.

Thank you. That is correct -- are you saying the delta effect would override the vol effect, though?

If so, there has to be an ideal time spread between the two legs to adjust for this, maybe?

Maybe on a defensive basket, such as utilities, to minimize deltas during a correction? What's the cheapest way to carry a long vol and/or long correlation position?

Maybe a ratio calendar where I'm short 2x front and long 1x long-term and hedge any short delta with the longs already in the book? Maybe hedging the long delta position with futures?

I'm trying to identify long vol and/or long correlation strats with low negative carry to overlay on a long vanilla equities book.

 

[newwurldmn]

If you want to be long vol for a hedge then don’t sell any vol against it. Those positions get very tricky.

 

[312]

If you want to be long vol for a hedge then don’t sell any vol against it. Those positions get very tricky.

Thanks. Agree it's tricky, I'm not looking for market-maker precision, just something that is broadly right and doesn't blow up, that affords me to increase leverage a little bit.

Ideally a simpler version of a [short vol, long variance] swap.

 

[newwurldmn]

Thanks. Agree it's tricky, I'm not looking for market-maker precision, just something that is broadly right and doesn't blow up, that affords me to increase leverage a little bit.

Ideally a simpler version of a [short vol, long variance] swap.

When you have a hedge it’s really important the hedge perform when you need it to perform. For that, you need the precision if you are spreading vol because the second and third order vol effects become the relevant ones.

 

[Robert Morse]

Thank you. That is correct -- are you saying the delta effect would override the vol effect, though?

That is my expectation as front month-which you are short, expands faster than the back month and the spread will have a +delta.

 

[312]

Fair. So hedge the deltas with futures, then? Or lean towards a put calendar? (or straddles... or something long correlation)

 

[truetype]

I'm trying to identify long vol and/or long correlation strats with low negative carry to overlay on a long vanilla equities book.

The never-ending search for free put options...

 

[312]

The never-ending search for free put options...

Ha. Note I said cheap, not free. I think it can be accomplished if I need it to "broadly" work in an already diversified book. I'm not looking for air-tight protection, rather something with similar protection levels to long treasuries or long CHF that is cheap to carry.