So where is your 1x2 ratio? You'd better learn your deltas. They might help you to keep control of a monstrosity like this if it starts to run. Still no answer about why you choose to be so capital intensive. Money to burn? I have attached a picture of what it would look like to weight the basket with volatility and price. Volatilities are a couple weeks old but you get the idea. You could take it one step further (and better) by weighting it with betas. As you see, 80% of the index can be replicated with 19 of the 30 stocks. My comment about the difficulty doing partial replication of price-weighted baskets was based on the fact that price weighting requires a greater percentage of stocks than a cap weighted index.
That ratio looks good, but you do realize itâs a crude indicator and not representative of the statistical implied correlation between components / index ? As I understand from your posts, youâre wanting to trade a reverse dispersion by shorting the component Puts and go long the index Puts, right ? I cannot understand for the life of me why you go long stock and short calls to replicate a short Put. Why not just short a Put and save yourself some slippage, which would amount to quite a lot of money over 30 stocks ? Others have asked this question too. Anyway, I cannot understand your ratioâs; Only with stock âTâ do you have a genuine synthetic short Put, whereby you bought 1000 shares and sold 10 Calls. In all other cases you havenât sold enough calls. Your basket on the component side seems to be weighted according to option premium received, but this then is a factor of IV which (I think you agreed) shouldnât be considered ? Surely a properly weighted basket would be weighted by $Delta ? (Contracts Qty x Strike x Option Delta). If the component IV / Index IV ratio is near +2 as you state, a properly weighted reverse dispersion portfolio would be done for a huge credit, not flat. What does âCalls $ Distributionâ mean ? You've spent over $1.3 Million on stocks, is this a paper trade or for real ?
wow , so much negative comments , sorry that I post this file , I should of known better... Anyway , I will post intra position adjustments when necessary. Looks like I have a first huge winner (PFE +12% in pre-market). I will sell some and buy back corespondent portion of DIA puts
You seem to have taken offence - why ? I'm trying to learn this strategy, that's why I posted questions to you. They aren't "negative comments" at all, they are genuine questions. If you don't know the answers say so, I certainly would given the other way around. Sorry for offending you.
Ok, maybe we can help each other ? I'll post up what I *think* would be a balanced portfolio later today.
for whatever it's worse.. here is short summery of this position: 1. Very (very) low risk 2. Portfolio is hedged , where amount of long DIA puts comes from AveBasketPrice*TotalShares/DiaPrice/100 3. Every stock contributes his portion for purchasing the DIA puts via sell of calls 4. Amount of calls derive from individual component's IV ( the higher IV the lesser the # of calls, only three in case of GM) 5. Possibility to assign directional bias (which is long at this sample) by selling more calls 6. Possibility to go on margins when buying stocks 7. Possibility to collect 2/3 of DOW dividends which is around 2% 8. Very interactive intra positions adjustments 9. Most favorable entry condition : when Basket IV / Index IV is >2 I am done , good luck all
Why, what's up ? This is how I'd balance a short dispersion portfolio; feel free to rip it apart... Balanced by $Delta (Contracts Qty x Strike x Option Delta).