SSO SDS SPX ES correlation

Discussion in 'Options' started by PocketChange, Mar 24, 2010.

  1. Any Options Gurus care to explain the correlation SSO and SDS options have to the underlying SPX/ES?

    One can easily correlate SPX and ES and their options.

    These Ultra ETF's are adjusted daily and target 200% of SPX.
    Earlier today SSO was at 41 and SDS was at 31.

    What exactly do these prices reflect?
    Are the daily adjustments just an arbitrary reset?

    Their option strikes are set at a point but as a percentage require significant movement compared to SPX. How are these options impacted by these daily adjustments?

    What impacted does the leveraging mechanisms of the ETF have on its options pricing. Every session seems to start with a big gap adjustment.

    SPX UPRO SSO Chart
  2. This may be not exactly be what you're looking for but the March-2010 Futures Magazine has an article explaining how & why leveraged ETF's appear to "diverge" from their underlying and have a downward "drift". :cool:
  3. A little more information.

    Currently have an algo that uses ES Future Options to Hedge the underlying. Essentially wrapping a trading range with options and scalping the futures inside.

    SPX provides a correlated cross Instrument hedge and can be used in lieu of the ES Future options. SPX Option strikes are wider = 2 ES strikes. SPX options have better liquidity and tighter spreads... often 0.01 compared to the typical 0.50 for the future options.

    Investigating using SDS and SSO to further improve the hedge by compressing the trading range based on its 2x leveraged design.

    I'm not seeing the 2x effect on their options nor am i able to correlate these instruments directly to ES. They kind of look like a paper trading account resetting at the end of each day.

    I've attached a snapshot of the option chains from yesterday.