Structure a one to one trade

B

bln

Is it possible to to structure a trade so that if the next days close is lower than today's close I win $1 and if it is higher that today's close I lose $1, and the opposite for a reverse trade.

I'm looking for a 1:1 profit vs risk and I will put on the trade in the 5 minutes before the market close of the current day.
 
With some handwaving:

1. Next days close lower than today's close wins $1 -> Put Option with delta 1
2. Next days close higher than today's close wins $1 -> Call Option with delta 1

Wouldn't this just be a deep ITM option? You have to contend with greeks, but if you're not on a first name basis with a huge bank that will make you a market it's probably the best you'll get.
 
gaussian said:
With some handwaving:

1. Next days close lower than today's close wins $1 -> Put Option with delta 1
2. Next days close higher than today's close wins $1 -> Call Option with delta 1

Wouldn't this just be a deep ITM option? You have to contend with greeks, but if you're not on a first name basis with a huge bank that will make you a market it's probably the best you'll get.
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The return and risk must be regardless of price distance. A winning trade in the SPY may be only 0.05 in price movement while a losing trade may be 2.00 in movement. The risk vs reward should be 1:1 or close to it.

Currently I'm trading the signals from this model using a Bull credit spread or Bear credit spread. Ie. sell the ATM strike and buy the next strike as a hedge. The drawback is that the RR-ratio is around 2:1 to 1.5:1 for this vertical spread.
 
Duh, I must be really stupid of not thinking of this prior. Just by deploying a debit spread instead of a credit one flips the equation and solves my issue the RR-ratio.
 
bln said:
Currently I'm trading the signals from this model using a Bull credit spread or Bear credit spread. Ie. sell the ATM strike and buy the next strike as a hedge. The drawback is that the RR-ratio is around 2:1 to 1.5:1 for this vertical spread.
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Buy/Sell with the ATM in the middle of the two strikes instead of the ATM at one of the strikes. Much closer to 1:1. Also look at trading your signal in instruments very highly correlated withe SPX to get the ATM closest to the midpoint. Also one of your correlates will usually be cheaper (dearer) compared to SPX -- give up a little in semi-attachment (variance error) to gain some in edge (bias error). AKA Aaron Brown's favorite trade.
 
Kevin Schmit said:
Buy/Sell with the ATM in the middle of the two strikes instead of the ATM at one of the strikes. Much closer to 1:1. Also look at trading your signal in instruments very highly correlated withe SPX to get the ATM closest to the midpoint. Also one of your correlates will usually be cheaper (dearer) compared to SPX -- give up a little in semi-attachment (variance error) to gain some in edge (bias error). AKA Aaron Brown's favorite trade.
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I will look into the best approach. Thanks for the input, appreciate it.
 
nooby_mcnoob said:
How can you actually execute that trade though? Do you mean "near the close" instead of the actual close?
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True, if the closing is between two strikes, I'd select the upper available strike for a short trade and lower strike for a long trade.
 
bln said:
True, if the closing is between two strikes, I'd select the upper available strike for a short trade and lower strike for a long trade.
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Ah but I was thinking even more elementary like you can't trade at close, although sometimes you can trade options after the close. Besides you can build a synthetic strike if you really wanted to.
 
Kevin Schmit said:
Buy/Sell with the ATM in the middle of the two strikes instead of the ATM at one of the strikes. Much closer to 1:1. Also look at trading your signal in instruments very highly correlated withe SPX to get the ATM closest to the midpoint. Also one of your correlates will usually be cheaper (dearer) compared to SPX -- give up a little in semi-attachment (variance error) to gain some in edge (bias error). AKA Aaron Brown's favorite trade.
More...

Agreed
... All vertical spreads ( for any expiration )
... are priced at approx 50% of the strike width ( the extrinsic premium for ITM / OTM strikes offsetting subject to IV skew )
... with the implied Forward ( or Spot if carry is negligible ) half way between the strikes
 
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