Talk about relationships--check this one out: http://www.market-topology.com/index.php?option=com_impactopia&view=friend&Itemid=2 and say thanks you!
If this is true then how do you explain that in the past 100 days, ORCL has risen 35% and AAPL had appreciated almost double that?
If you start with a ridiculous assumption and layer on more ridiculous assumptions, what do you end up with? Even if you had a very high correlation, selling a naked option on expiration day is no more than a crap shot in the dark. The whole point of a pairs strategy is to take advantage of a reversion to the mean and that takes time.
Ridiculous or not, the OP was giving a theoretical example and asking a theoretical question. He never suggested that the correlation exists in the real world. Mark
Spin, I agree with Mark and with you - he was starting with an unrealistic assumption that was meant to be fictional, yet he used real symbols, which like you say would have been better with XYZ, ABC, etc. I assumed AAPL and ORCL to be basically fictional for the purposes of this thread. JJacksET4
Thank you for taking the time to truely read the posts. It was repeated several times that it was hypothetical, that AAPL and ORCL were used as placeholders. This was mainly to make the question not too complicated, to avoid contaminating it with other potentially distracting facts and to make it more concrete. The relation seems to exist for some baskets of stocks under certain market conditions. Never asked to check if such a relation exists for AAPL and ORCL. If the question is too confusing in the current form please feel free to insert ABC and XYZ or whatever suits better.
OK, let me try to cobble something relevant together. A "hypothetical" intraday 2:1 price movement relationship does not give you any edge unless you can figure out the direction and catch some trend. Otherwise, as noted in you 4 hour numbers, you haven't gotten anywhere, particularly when you're talking about something moving in 10ths of a percent. Even before conjuring up a strategy, I'd say that because options have more slippage than equities, anything that moves up and down so little intraday is going to eat you alive. Only large intraday moves will get you anywhere and that isn't always the case.
Before going forward, I present to the jury that there's insufficient information to do more than speculate at some hypothetical possibilities. Be that as it may... What's distracting is the 2:1 relationship. You can't be long ABC and short XYX or short ABC and long XYZ in equal amounts because in one direction you make 2:1 and in the other you lose 2:1 Since you stated that you have no clue which direction they'll move, that implies that you have to be directionally long in both directions which suggests long straddles on both. This will do quite nicely in trends, quite poorly in congestion and will eat you alive in intraday slippage if no trend. To avoid the 2:1 vs 1:2 conundrum, you'd have to double up on one side in order to get to 2:2 which is no edge since regardless of where it goes, you make what you lose. So where does that leave you? For me, it leads back to my suggestion of a possible pairs strategy. (see next reply)