What do you guys think about this strategy?
https://knfpan.pan.pl/images/Fin._110-17_10-J.Flotynski.pdf
https://knfpan.pan.pl/images/Fin._110-17_10-J.Flotynski.pdf
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long/short straddle strategy
- Thread starter qlai
- Start date
Oops, I provided wrong link.
We implement the strategy as follows.
1. We collect all options data for SP 500 stocks from the OptionMetrics database.
2. On the day following the standard option expiration date (usually the day after the third Friday of each month), we calculate the slope of Implied Volatility Term Structure (IVTS) for each stock.
3. We then rank these stocks by IVTS and group them into 10 deciles. Group 1 includes stocks with the most upward-sloping term structure (positive slope) and group 10 includes those with the most inverted downward sloping (negative slope).
4. For stocks within group 1, we buy equal dollar amount of one-month ATM strad- dles and hold them until expiration. For stocks within group 10, we sell short an equal amount of one-month ATM straddles and hold them until expiration.
5. We repeat the process on the day following the expiration day.
Attached the article
We implement the strategy as follows.
1. We collect all options data for SP 500 stocks from the OptionMetrics database.
2. On the day following the standard option expiration date (usually the day after the third Friday of each month), we calculate the slope of Implied Volatility Term Structure (IVTS) for each stock.
3. We then rank these stocks by IVTS and group them into 10 deciles. Group 1 includes stocks with the most upward-sloping term structure (positive slope) and group 10 includes those with the most inverted downward sloping (negative slope).
4. For stocks within group 1, we buy equal dollar amount of one-month ATM strad- dles and hold them until expiration. For stocks within group 10, we sell short an equal amount of one-month ATM straddles and hold them until expiration.
5. We repeat the process on the day following the expiration day.
Attached the article
Attachments
I like the simplicity of it. You are basically shorting high IV and buying low IV, as predicted by the market itself.
I am guessing they would be opening short straddle into every earnings release.
@Matt_ORATS would it be relatively easy to run this back test and compare results to what they posted?
I am guessing they would be opening short straddle into every earnings release.
@Matt_ORATS would it be relatively easy to run this back test and compare results to what they posted?
I like the simplicity of it. You are basically shorting high IV and buying low IV, as predicted by the market itself.
I am guessing they would be opening short straddle into every earnings release.
@Matt_ORATS would it be relatively easy to run this back test and compare results to what they posted?
I have read the opposite strategy is more likely to work. High vol tends to outperform and low vol tends to underperform.
But this strategy looks at the term skew, not just current IV rank. Are you saying your strategy was taking skew into account as well?I have read the opposite strategy is more likely to work. High vol tends to outperform and low vol tends to underperform.
But this strategy looks at the term skew, not just current IV rank. Are you saying your strategy was taking skew into account as well?
The study I read used some form of IV rank.
term structure is just a way of normalizing. For a strategy like this to work there would have to be some anomaly related to the flows (like people tend to overbuy the inverted term structures). That has not been my experience. Term structures are inverted for a reason and they are upward sloping for a reason (especially if that upward slope is 1st decile).