How asset price affects your alpha

Discussion in 'Options' started by TheBigShort, Feb 3, 2019.

  1. ironchef


    #31     Feb 8, 2019
  2. ironchef


    Actually I was thinking the same thing but you were one step ahead of me.

    I was reading Colin Bennett's book the other day (from sle's post) and tried to generate some positions using correlation pair. Your comments mean maybe I can find high beta and low beta stock pair and use this BAB strategy to get better risk adjusted returns?

    I don't know what I am talking about, so please comment.
    #32     Feb 8, 2019
  3. Adam777


    I was asking about how how to use Beta in basic options trading, not pairs trading. I found Sinclairs books had more complete ideas and less scattered than Bennet’s book
    #33     Feb 8, 2019
  4. ironchef


    I don't know, from my experience Beta is a two edge sword. In a bull market it is wonderful but in a down market unless you are careful it can hurt bad. I am looking at pair so I can trade delta neutral and less affected by direction.
    #34     Feb 8, 2019
  5. ironchef



    After reading the paper a few more times, ignoring the math, I think I have a better understanding of what you, Kevin and Magic are saying.

    As a retail trading my own money, I have few constraints so I can invest/trade leverage low-beta assets. Will I be better off trading a beta neutral high-low mix?
    #35     Feb 9, 2019
  6. srinir


    I would caution making wholesale changes in portfolio based on some recent results or backtest. These factors can under-perform after they were discovered and can go years before they mean revert. Just look at Value and Size factors. Value has been a dog for almost a decade and Size is not that much better. If I employ these long short strategies, i would do so at the margins.
    #36     Feb 9, 2019
    ironchef likes this.
  7. ironchef


    #37     Feb 10, 2019
  8. Adam777


    Thank you for the book. Reading it now, as well as two of Sinclair's books for the third time.

    I'm very new to all this, but in "Volatility Trading" by E. Sinclair he mentioned on page 61 regarding "the market overestimating volatility for firms with: large size, high return on assets, and high leverage". Hence theres profitable opportunities selling volatility on large caps with low PE, which agrees with you mentioning selling options on the higher priced underlying.

    Also wouldn't jumps with high priced large caps be smaller percentage wise, than jumps on lower priced stocks/growth stocks? Hence with the large cap, it's underlying price would be less likely to jump out of, and hence stay within the breakeven prices of the straddle/fly when shorting implied volatility during earnings etc?
    Last edited: Feb 11, 2019
    #38     Feb 11, 2019
  9. Hi adam, low P/E large MKT cap is very different than high priced high vol stocks.

    If you could provide research showing this is true I would love to see it. Although Euan mentions this in his book, and tries to prove it with a small table of data, it does not excite me. On top of that Low P/E Low Growth companies have a smaller implied move associated with them. If you could prove that the variance premium is overstated in mature companies vs growth companies with at least 100 companies and 20 quarters under the microscope, that could be the start of a trading strategy.
    #39     Feb 11, 2019
  10. Fascinating thread that resonates with something I am thinking about.

    I don't want to derail this, but are there any thoughts on the merit of buying volatility of an index such as NQ and selling volatility of (some or all of) the constituent shares?

    There is obviously a correllation (beta) to calculate respective position size so that the lower-priced long index option hedges higher-priced short stock option for an individual stock, but I'm struggling with how to correctly hedge for more than one stock.

    Thanks in advance for any thoughts.
    #40     Feb 13, 2019