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Question about index arbitrage strategy
- Thread starter Erich95746
- Start date
Originally posted by sabena
what index options have the lowest ratio of
spread/option , OEX or QQQ, on average ?
without question, the QQQ...Even though I have very rarely traded QQQ options, I have them on my screen and they are extremely tight across many strikes, near the money, out of the money, everywhere...OEX, on the other hand, might be a bit tighter OTM, but ITM and/or ATM they can trade with buck wide spreads...just ugly
Originally posted by vulture
Actually, another thought on the subject...If I were so inclined and had the patience and discipline to execute a specific strategy only a few times a year..The one that I would execute would be a simple volatility play...Just buy and buy and buy OEX options in the front and deferred months when the implied volatility traded within x percent of its 52 week lows...keep rolling them out following any losses in the front month...Kinda like Nassim taleb's strategy but with a specific volatility input...
You could also just trade seasonal tendencies, like loading up on OTM puts in the late summer when volatility contracts for the seasonal sell-off in Sept-Oct...that has been a sure play for a number of years...
Vulture,
I am trying to understand what your strategy is trying to do. If I understand what you are writing correctly, do you mean to buy OEX options of the same strike (really not sure if this is what you mean) across time, and thus benefit if and when the volatility goes up? I think I'm not understanding you because if this were true, you would be extremely long (or short) on delta, which is not the goal of this case. Can you clarify? Thanks.
The basic argument that I am making is that low volatility(as measured by a pretty basic and generic index like the VIX) has a pretty reliable base at which point volatility returns to an up cycle...Sure there have been extended periods of time in the early to mid 90's where volatility stayed low and went lower...But even this March, I remember many people saying "volatility is compressing and will return to the mid 90's averages"...That was the low on March 31, 2002(also end of 1st quarter)...From that point forward, we have been in an uptrending volatility environment...My simple point is this: You define what is low volatility....You then position yourself in the market in front month and potentially deferred month put positions...You carry inventory in the back months as well to be able to trade into different spreads, etc...But basically you are taking a long volatility position...You are also taking a directional position as well...But this is only an effective strategy when all of the elements line up...You need the low volatility and the direction for the most part to make this work...
Originally posted by vulture
The basic argument that I am making is that low volatility(as measured by a pretty basic and generic index like the VIX) has a pretty reliable base at which point volatility returns to an up cycle...Sure there have been extended periods of time in the early to mid 90's where volatility stayed low and went lower...But even this March, I remember many people saying "volatility is compressing and will return to the mid 90's averages"...That was the low on March 31, 2002(also end of 1st quarter)...From that point forward, we have been in an uptrending volatility environment...My simple point is this: You define what is low volatility....You then position yourself in the market in front month and potentially deferred month put positions...You carry inventory in the back months as well to be able to trade into different spreads, etc...But basically you are taking a long volatility position...You are also taking a directional position as well...But this is only an effective strategy when all of the elements line up...You need the low volatility and the direction for the most part to make this work...
Or better still sell volatility when it hits an extreme high. IV seems to collapse much quicker than it rises. Anyway, either strategy is too much for my weak stomach.
Originally posted by bungrider
I would think a more profitable strategy would be purely selling OTM index options - short straddles. Risk would be even lower, since you could sell further OTM options than the OTM calls in the above strategy for the same profit, and these further out options will sport higher thetas.
hmmmm did you mean vega's?
Originally posted by Mike777
Or better still sell volatility when it hits an extreme high. IV seems to collapse much quicker than it rises. Anyway, either strategy is too much for my weak stomach.
Actually, it really does work both ways...The OTM puts, especially index options, have that big skew to the put side where the OTM puts will always trade with higher IV's...When the market is not pricing in much volatility, prior to those big IV explosions, you get some serious bang for the buck...I played the OEX alot back in 1998-2000...There were definitely days in early 2000 when the volatility curve was going up and down, up and down and when you timed it right it was just an explosion...
THe only reason I am less inclined to try and game the sale of high IV is that, historically, you never ever really know what is the upside limit to exploding IV's...There is always the outlier lurking and you just never can be certain that THIS very MOMENT is the peak...On the flipside, stats work in your favor over time if you are a low IV buyer...Alot will disagree with me on this one and there is a general consensus of thought out there that people ALWAYS want to be IV sellers, but I just don't want to play that game...I also don't trade the options too much anyway anymore...BUT, if I were so inclined, to make this a strategy with specific rules, I would always look to be a low IV buyer when the odds lined up in my favor...I might spread high IV against low IV positions and trade into some volatility spreads...But I would not be initiating open legs short high IV...I just don't like that open ended risk...That is more of a Neiderhoffer type strategy