Hi all, I have modelled the volatility and correlation of the stock prices of the two stocks jointly,... and based on the model, I have a forecast of tomorrow's volatility and correlation. What trading strategies shall I use to trade volatilities? Thanks
one strategy is writing options on expected volatility decrease buying options on expected volatility increase very very complex stuff...!
Thanks. I should have added that I am looking for short term trading such as 1-day time frame. Also the way you suggested is not pure vol play, i.e. not price neutral. Of course I can long straddle on one asset and short straddle on the other asset... I am looking for more ideas... esp.hopefully involving the correlation...
Since you are asking such basic questions, wouldn't you be better served with a google search or buying a book or two? Just a thought...
Well, if you think "correlation" trade is basic... please give me some pointers. For example, some books? I will go buy them... Thanks!
Just a guess, as I have no experience with pairs-trading, but the obvious thing to try is to trade the pair towards mean reversion on days your model predicts high correlation, and trade a break-out strategy on days the model predicts low correlation. Do a regression of the prices of one instrument vs the other, use the slope of that regression, to get the ratio of how many shares to go long and short of each instrument, when you go long or short the pair.