Pairs Volatility Trading

[tommo]

Hi,

No idea if the title of this thread is what this trade would be called, but seems to make sense.

If I found two correlated assets and found the IV was higher on one than the other and expected their relationship would mean revert based on historical tendencies, would buying an ATM straddle in one and selling an ATM straddle in the other be the most efficient way to setup this trade?

Thanks

 

[newwurldmn]

Hi,

No idea if the title of this thread is what this trade would be called, but seems to make sense.

If I found two correlated assets and found the IV was higher on one than the other and expected their relationship would mean revert based on historical tendencies, would buying an ATM straddle in one and selling an ATM straddle in the other be the most efficient way to setup this trade?

Thanks

ideally in variance if that was available to you. Otherwise atm straddle is a good way to do it.

you might have to adjust your strikes every once in a while as your Vega might get mismatched as one stock moves away from the other.

 

[Gambit]

ideally in variance if that was available to you. Otherwise atm straddle is a good way to do it.

you might have to adjust your strikes every once in a while as your Vega might get mismatched as one stock moves away from the other.

I am guessing the answer is "It depends" but would this form of vol spreading be viable for a retail trader?

Adjusting strikes may mean crossing the bid ask for a retail trader which erodes the edge.

 

[newwurldmn]

I am guessing the answer is "It depends" but would this form of vol spreading be viable for a retail trader?

Adjusting strikes may mean crossing the bid ask for a retail trader which erodes the edge.

yes if your edge is big enough to overcome the transaction costs and the edge is large enough for the margin req.

 

[guru]

In case they’re stocks of individual companies, you may want to watch out for earnings dates, as they can be a big driver of vol mismatch and lead to false & failed arb.

 

[Gambit]

In case they’re stocks of individual companies, you may want to watch out for earnings dates, as they can be a big driver of vol mismatch and lead to false & failed arb.

The indices are a better starting point for retail probably and maybe the inverse ETFs.

 

[tommo]

For me the biggest issue is getting the data. There is obviously easily accessible volatility charts for major indexes and commodities. I think it would be more specialist finding an implied volatility spread chart of one product against another

 

[newwurldmn]

The indices are a better starting point for retail probably and maybe the inverse ETFs.

ndx spx will give you best margin treatment as both are considered broad based indices. It’s also probably the most picked over vol spread with eurostoxx/spx being second.