How to structure trade for inverse indices

Discussion in 'Options' started by HFStartup, Jan 16, 2012.

  1. spindr0

    spindr0

    It's only capital intensive when the strategy fails. CC's are equal to NP's and they have low initial margin requirements. But as I mentioned in my previous reply, not a good approach.
     
    #21     Jan 17, 2012
  2. newwurldmn

    newwurldmn

    How about trading an option on one index and delta hedging with the other index. You will be taking the vol view that you want and given the high correlation should remain "delta neutral" while accumulating additional alpha from the mean reversion.

    Suppose index A is -2% and index B is +2%
    Sell a call on index B and buy stock delta neutral on index A.

    Monetize the gamma/theta of index B while making 4% on your delta size from the mean reversion.
     
    #22     Jan 17, 2012
  3. spindr0

    spindr0

    Your primary concern is direction, not volatility which is gravy.

    Long straddles are tough enough to profit with. Buying one on one index and selling on another is going to hammer you if you get direction. An IV contraction may soften the blow.

    It's a bit of work but I'd look at your historical A-B extremes and backtest whatever option strategy amuses you. Ignore the IV component initially. You have to capture the directional movement of A-B not be hurt by it. AFAIK, selling naked straddles on one index and buying them on another seems to defy that. Backtesting will answer a lot of questions.
     
    #23     Jan 17, 2012
  4. rmorse

    rmorse Sponsor

    You should look at these trades $ delta neutral, rather than delta neutral. They move in inverse percentages. If they are not adjusted daily to be $ delta neutral, the next day you'll be off and have a higher margin requirement.
     
    #24     Jan 17, 2012
  5. newwurldmn

    newwurldmn

    Yeah. I was talking in Dollar Delta terms but I hadn't made that clear.
     
    #25     Jan 17, 2012