what do you mean by synthetic straddle in futures? I know index options are generally overpriced... that's almost a given fact, hence dispersion trading...
Something to Leave you With
- Thread starter Spectre2007
- Start date
what do you mean by synthetic straddle in futures? I know index options are generally overpriced... that's almost a given fact, hence dispersion trading...
Using a algo that actively trades futures to create a synthetic straddle.
How? How do you create that straddle? By negative scalping?
I understand what you're meaning to do, but I wouldn't perse call it a synthetic straddle...
You're saying the IV is too high compared to actual Vol, and therefore selling the straddle and keeping the delta around zero by selling down and buying up. Potentially risking lots of negative scalps, but assuming those don't outrun the theta...
It's just gamma short/vega short trading
Kinda like the above image but it's a naked straddle in the above image.
With what I'm talking about it's a 'covered' straddle. Meaning you actually own the futures.
In the above image quantity size would just stay at 1.
So you start out by long future and short straddle? So it's a slow long play? And you want to have a discount on the future by selling a straddle?
And by 'covered' you mean you're hedging the delta if we go down by selling futures...
Always either net long or short futures using algo to do it actively. Using strike price as pivot.
Constant delta flat position? Or overhedged?
Constant delta flat.
I called my friend up to poke holes in it. He said institutions do it if they have infrastructure to do it. Which most do. So if technology is available to arb it, why does it exist. Only thing that comes up, is more money is made selling the straddles. Most fund managers don't think of the infrastructure outlay to actively do what I described.
You don't need much infrastructure to do this. I can do it manually even... and it's not an arb, since you don't know exactly what the future vol is going to be so you might completely miss-judge the hedging and get screwed on both large up/down moves with negative gamma and an IV squeeze. It's most certainly not riskless... at all....
If you do this, I think you need to have some elasticity in it. Otherwise you're overhedging/overtrading and cost together with too many neg scalps will erode the theta too quickly.