Value vs Growth relative value trade

rucola · Jul 18, 2020

if on trading view you chart VTV and VUG, look at 6 month performance. big underperformance of value vs growth. I want to bet that that gap will shrink going forward, mean revert to more "normal" levels. so essentially i'm going long value and short growth (for that gap to close). i'm not doubling down... i'm going long one and short the other.
outcomes:
1) value does well, growth doesn't --- i make money
2) value doesn't do well, growth does well --- i lose money
3) market tanks... I make money on my growth short and lose money on my value long... i think in this scenario net net I'll still be green because growth should underperform.
4) market goes higher, both value and growth maintain current trajectory... i make zero.

for this reason, it's NOT a directional trade, it;s relative value.

vanzandt · Jul 18, 2020

rucola said:
if on trading view you chart VTV and VUG, look at 6 month performance. big underperformance of value vs growth. I want to bet that that gap will shrink going forward, mean revert to more "normal" levels. so essentially i'm going long value and short growth (for that gap to close). i'm not doubling down... i'm going long one and short the other.
outcomes:
1) value does well, growth doesn't --- i make money
2) value doesn't do well, growth does well --- i lose money
3) market tanks... I make money on my growth short and lose money on my value long... i think in this scenario net net I'll still be green because growth should underperform.
4) market goes higher, both value and growth maintain current trajectory... i make zero.

So all 4 scenarios except #3 would do the exact same if you only went long VTV.

And regarding #3.... Beta on VUG is 1.03 and VTV is .99.... so #3 you might as well throw out too.
Just buy the puts if a rotation is overdue. Anyway good luck. Someone else can jump in. You listed 4 scenarios and you lose money in 3. Welcome to et btw.

remoteControl · Jul 19, 2020

Why use puts on VUG and have to time it right? Why not go short outright?

@vanzandt, isn't avoiding losing money in scenario 3 worthwhile?

taowave · Jul 19, 2020

How does the absolute vol levels and skew compare between the 2??

What's your guesstimate as to where the ratio goes??

deaddog · Jul 19, 2020

rucola said:
i'm not a day trader. I don't even look at what's moving. I look at what's cheap.

I assumed you were a trader because you are using options.

You can trade momentum over longer periods that one day.

rucola · Jul 19, 2020

remoteControl said:
Why use puts on VUG and have to time it right? Why not go short outright?

@vanzandt, isn't avoiding losing money in scenario 3 worthwhile?

cheaper to use options than shorting stock. but agree with you, timing it right is the difficult thing. just don't want to keep (short stock) position open for months it will be too expensive.

rucola · Jul 19, 2020

taowave said:
How does the absolute vol levels and skew compare between the 2??

What's your guesstimate as to where the ratio goes??

3m return - value underperformed growth by 13%
6m return - value underp. by 25%
1yr - value underp. by 33%

you get the point. i don't think value will go higher, i think growth will move closer to value.
I expect a repetition of what happened from sept 2018 to end of 2018... where growth mean reverted back.
as far as options are concerned i'm thinking between Sep and Dec puts...

Real Money · Jul 19, 2020

I don't know anything about all those ETFs but I know the futures markets.

The growth/value spread is traded using futures buy levering exposure long/short in NDX/DJX.

(not sure if this is what you mean)

Anyway, the ratio is (40 * Nasdaq) - (15 * DJX).

Maybe you could compare this to your ideas. You might want to look into this spread as a correlated synthetic portfolio to whatever you decide to trade here. That spread could be traded using ETFs but it's surely not as capital efficient to do so.

taowave · Jul 19, 2020

I fully get what you are hoping to capture..

Look at the ratio of the 2 instruments.

Back into which strikes you would like to trade if you aren't going to trade the EFT's..

You need to beta adjust/make adjustments for vol..

Any reason why you want to trade options as opposed to the underlying??

I havent looked at the relative options so I have no opinion..

rucola said:
3m return - value underperformed growth by 13%
6m return - value underp. by 25%
1yr - value underp. by 33%

you get the point. i don't think value will go higher, i think growth will move closer to value.
I expect a repetition of what happened from sept 2018 to end of 2018... where growth mean reverted back.
as far as options are concerned i'm thinking between Sep and Dec puts...

vanzandt · Jul 19, 2020

taowave said:
I fully get what you are hoping to capture..

Look at the ratio of the 2 instruments.

Back into which strikes you would like to trade if you aren't going to trade the EFT's..

You need to beta adjust/make adjustments for vol..

Any reason why you want to trade options as opposed to the underlying??

I havent looked at the relative options so I have no opinion..

This thread needs Destriero lol..... for better or worse. Brace yourself OP.