Strategies · Library · Options
§2.12Trend
Long combo
Buy an out-of-the-money call and sell an out-of-the-money put, same expiry. The sold put pays for the call, so entry cost is small, but a big fall hurts.
Open in the builderAs a long-only proxy; see how ARCANE uses it.
- Asset class
- Options
- Held for
- To expiry
- Data
- ARCANE has part of the data
- Symphony
- Builds as a long-only proxy
The rule
- Signal
- Bullish; the trader accepts stock-like downside below the put strike in exchange for cheap upside.
- Entry and exit
- Buy a call at a higher strike and sell a put at a lower strike, same expiry, often for near zero net cost. Close at expiry or when the move has played out.
- Sizing
- 1:1 (one long call at the higher strike, one short put at the lower strike)
How it fails
- Loss grows below the put strike, down to nearly the whole stock value
- Gain unlimited above the call strike
- Dead zone between the strikes where little happens
- Put assignment and margin demands
Data it needs
- options chain with strikes and premiums
- implied volatility by strike and expiry
- underlying daily price
ARCANE has the underlying daily close but no options chains, strikes or implied volatilities
How ARCANE uses it
Matches a bullish Call that pays if the price rises past a stated level, with a lower level as the point of failure. Paper only.
Builds as a long-only proxy. Holding the underlying approximates the directional exposure; the strikes and sold put are dropped.
Filed under the trend card
Hold each market in the direction of its own return over the past year, and size every position to the same expected volatility.
A paper plan from this card holds 21 to 252 days, stops at 2× the expected move and uses at most 100% of your risk budget. The card
Source: Kakushadze and Serur (2018), 151 Trading Strategies, §2.12, p. 22 of the SSRN version. Described in our words. Trend is ARCANE’s filing, not the book’s.