Ratio for stock cross hedge

Discussion in 'Options' started by Real Money, Dec 4, 2022.

  1. Can I use implied vol or implied move ( .85 * ATM straddle ) to calculate long/short ratios for stocks, ETFs, sector ETFs, etc.? Maybe with beta?

    I'm currently just using change in price estimates, or % change in price to balance the spreads.

    I want to day trade S&P sector ETF spreads, stock basket spreads, and other kinds of price differentials. It's a hassle to price all the spreads.

    It's very easy to look up a hedge ratio for rate and index futures. For other listed securities, not so much.

    Just like you can use the CME intermarket ratios for futures, I need fast ratios for pairs and baskets, etc. Got a website or quick and dirty formulas? Rule of thumb?
     
  2. jamesbp

    jamesbp

    Implied Move does NOT equal ATM Straddle *0.85
    This is just TastyTrade nonesense peddled to the masses

    Take a simple example
    Spot = 100
    Time = 365 Days
    IV = 20%

    What is the

    #1 ATM Straddle ?
    #2 Implied Move ?
     
    Real Money likes this.
  3. could you give a simple example what the trade looks like? You mean long 100 shares spy, and short 85 shares aapl? Or something like that?
     
  4. Yes, sort of. This is an example.

    With last closing prices -- XLK = $135.36, XLF = $35.93.

    I price the spread as 100 shares XLK = $13536 and 350 shares XLF = $12575.50 where you are trading the tech ETF against the financial one. This is like a beta ratio spread. However, the daily returns (and variance/vol) of each ETF have to determine the spread ratio.

    A chart (10x that exposure) on medium time-frame looks like this. SECTORS.png

    I want to do similar with the other sector ETFs, and baskets. You can also use this ratio to trade both the ETFs long or short.

    It seems like I will just have to use daily returns data and variance. However, it would be convenient if I could just use implied vol and beta to get ratios for this stuff.
     
    Last edited: Dec 4, 2022