I am reading Volatility Trading by sinclair and he mentions in one of his chapters that hedging at realized vol will make p/l noisy but guarantee a profit, while hedging at implied vol will make p/l less noisy but profits uncertain. What does he mean by this? Especially when he says hedging at realized vs implied. Thanks. If you guys wouldn't mind keeping the answer as simple as possible to!!!!
Realized vol is actual vol the was calculated from past movement. Implied vol is the vol that the option markets expect will happen in the future. The statement "guarantee a profit" is not something anyone can count on. You would need to buy vol less than actual or sell higher than actual, then have a very low cost structure, margin offering and delta hedge at prices that maximize any profit. This is not easy and makes the assumption that current option markets are materially mis-priced. It also assumes you have a process in place to not over or under trade your hedging. This is generally not a good strategy for a "customer". It would be built into a Market Makers risk system.
Rob if I want to for example go long AVGO vol and short spy vol because the spread between them is near all time lows. How should I weight the trade between 2?
When I was a market maker, we had a saying, vol is higher for a reason. Vol is low for a reason. Sometimes the best time to buy is when vol is high and the best time to sell is when its low. In 2009 bank stock front month vol was over 300 and back month was around 100. The traders that make the most money bought the 300 and sold the 100. Getting back to buying the vol of any stock and offsetting the premium with the index. Not a terrible strategy but dispersion requires more than one under-priced symbol. You have to have reason to expect the market is wrong. That happens. It happened in February 2018. The key will be how you buy vol and how you trade around it. Let us know how you do. Bob
That’s the art. You could notional weight or weight based on volbeta. You could weight based gap risk.
I did not respond to that question as my compliance department does not like me to provide trading advice.
Okay so I have about 5 names where I think the implied vol spread between the spx and underlying's is understating the future vol spread. I will short the atm straddle on spy and long 5 underlyings straddles. The avg difference between spreads is 4%. I was thinking of using $theta to weight them. @newwurldmn won't gap risk only help me since I am long gamma in the individual stocks (more prone to large gaps). Did you mean vol or beta? Waiting by vol also makes sense to me. Since vol is a function of time I will be hedge everyday before the close rather than every x amounts of delta. Sound reasonable?
SillyWilly, As you are in Canada, you have to do this without a PM account. Is the margin on the short SPY/SPX options going to create a large margin requirement that makes the cash required quite high?
30% of the value of the underlying. But I will be using CFD's to hedge which will free up alot of cash