IVolatility Egar Service

Discussion in 'Options' started by Watson, Jun 22, 2004.

  1. Watson


    Hi all!

    I just wonder if anyone use Egar Service to take advantage of relative value differences in implied volatilities between an index and a basket of component stocks.

    Please provide me with some information on this one.

    All opinions are wellcome.
    Good luck to all!
  2. I used for a few months when starting a +dispersion portfolio... dropped the sub when the market favored -dispersion. It's a good service, but easily replicated with good data and excel.

    I was running a SOX dispersion and found that it was unnecessary since the SOX is so heavily weighted in a few issues.
  3. Hey riskarb. What is the usual difference in implied volatility that you see between the index and components? And is volatility arbitrage getting harder to do b/c of how well known it is? Thanks.
  4. There are dozens of hedge funds using dispersion as a primary strat. Used to be you could arb 400-500 basis on the +dispersion. I would guess the returns are negative now, maybe -100basis. There is zero opps in +dispersion now, arbed to death.
  5. Riskarb and others,
    What a surprise to find this thread. I have been trying to get more info on this subject for years. No one I have asked seems to know much about it, and most have not even heard of it. I beg to differ with the view that it is well-known. I have found it to be a best-kept secret. I have some comments and a few questions for anyone who would like answer:

    The strategy is named "dispersion" or "volatility dispersion" for a reason, but what is that reason? I think it is because the goal of the strategy is for the long equities prices to disperse, meaning they move and thus return to a more normal volatility, thus capturing the difference between their prices and the short index. Anyone know if this is correct?

    More has been written recently on this strategy by Steve Smith as thestreet.com, but when I read his articles it seems he is talking about something completely different. From what I learned (mainly EGAR articles), the strategy is implemented by using straddles (or something similar), long straddles on stocks and short straddles on the index. Any comments?

    The strategy is not a perfect arb, since there is a choice to be made of which stocks in the index to use, and thus there is a potential tracking error that could be important. Perhaps Riskarb is referring to hedge funds that use every stock in the index? I don't know but again EGAR seems to talk about stock selection as an important part of the strategy.

    I have done a basic spreadsheet on implementing this strategy on the DOW and the OEX. Of course the DOW is easier because of the weighting. What I saw was that 19 stocks in the DOW had close to "fair value" volatility, while 11 stocks had option volatility that was expensive. I would assume that one would avoid the stocks with expensive options when implementing this strategy.

    Of the top 15 stocks in the OEX (comprising more than half the index), 9 had options prices whose IV was close to "fair value", while 6 had option prices whose volatility was expense.

    Hope this helps,
  6. I run a long/short combo(straddle) portfolio. There are some interesting nuances to trading dispersion.

    1:1 correlations will produce a pure arbitrage trading dispersion, but you'll be producing a lock of a -100bp or worse. It's simply a matter of losing edge on the combos.

    I run some money for a whale in Philly who's very familiar with all the leading FoF's and MAR-listed funds. He's talked to a DOZEN funds that run dispersion as a primary methodology.
  7. riskarb,
    On one hand you say you are running straddles - I'm not sure what you mean by combos. I would have to assume based on your few words that you have long straddles on some stocks and short straddles on others. If this is not correct please say what you are doing.
    On the other hand you say that 1:1 correlations are a losing proposition. Again I would assume you mean that this is buying straddles on all the stocks in an index and selling straddles on the index.
    If you consider yourself to be doing dispersion trading with nuances, it would help to know what you are talking about,
    and what information the "whale" may have shared with you that would help us learn this strategy.

  8. combo=put&call combination

    1:1 correlation=pure dispersion; involving a pure representation of the index basket//component

    I'm not at liberty to release my dispersion strat. :(
  9. Sillyness.

    When he who has knowledge refuses to share of it, even the most basic, thus endeth the thread.
  10. Heh

    I trade private and public funds... why would I release ANY proprietary info? Clients don't have access to the specifics(but can be RE'd), why should you?

    I spent the time/energy to develop my models; I suggest you quit looking for handouts and consider doing your own homework.
    #10     Jul 2, 2004