i was asked to judge the following strategy: 1. buy stocks with relative high implied vola 2. sell atm calls 3. buy 20% OTM put the portfolio size is about sixty names. there is no fundamental analysis of the stocks. they are taking in for portfolio reasons, a momentum factor and relative high vola. the universe is 180 big european names. target return is 8% with a vola of 4%, resulting in a sharpe ratio of about 1.5. i am cautious about the strategy since i think the option market is not that inefficient to deliver a SR of 1.5 for this relatively low effort. i expect a pretty stable curve with sudden set backs when idisynchratic stock risk (IMHO the true source for high IVs) becomes evident. the question is whether the run periods exceed the set backs. i would expect so, but with a total sharpe ration not even near to 1.5. what is your opinion on that? another question: is that what kingate is doing? peace
You're selling a synthetic atm put credit spread with the hedge 20% otm, looking at 40 deltas per contract of so. No way you're going to see a 1.5 Sharpe with that strat. Long stock//short atm call = synthetic short atm put riskarb