1-5 Trades: multi-index spreads

Discussion in 'Options' started by samer1, May 19, 2012.

  1. samer1


    I have recently read an interesting article on so-called 1-5 trades on futuresmag.com (http://www.futuresmag.com/2011/07/01/using-spxoex-options-spreads-to-take-a-directional?t=options)

    The article discusses two spreads on two indices that are traded against each other.

    The trader simply buys a bull call spread on the SP500 and sells a bull call spread on the SP100. The idea is that the trader speculates on the spread between the SP500 and the SP100. More precisely, the spread is SP500-2xSP100.

    Does anyone have experience with this kind of trades? How do you construct a pnl graph for this kind of trades? Is the PnL graph three-dimensional, where the price of the SP500 is plotted on one axis and the price of the SP100 is plotted on the other axis?

    The trade is also taught by Randomwalktrading.com (I have no affiliations with this company). Has anyone taken their course or purchased their books?

    Many thanks in advance!
  2. It was referred to as the "SO" (ess-ohh) spread on the floor. Many ways to play it. 1:1 for an outright delta or vol bet, to the neutral (initial) greek bet on stat vol. It's out of favor now as it's a liquid arb/limited opportunity and wide-markets. It's more of a local-trade.

    IMO you're better off trading risk-reversal in the single index.
  3. samer1


    Thanks for the reply, Atticus...

    I read about the SO spread that it is the SP500 - 2 x SP100. This spread is basically bullish, meaning that it is positively correlated to the SP500. The spread goes up if the Sp500 goes up and vice-a-verse.

    Now, some people set-up the trade with a credit and a bullish view on the spread. However, the interesting thing is that if the market collapses, the trader keeps the credit. Hence, it is a long trade with downside protection.

    How can one analyze the trade? How is its PnL graph constructed?