Strategies · Library · Options
§2.13Trend
Short combo
Buy an out-of-the-money put and sell an out-of-the-money call, same expiry. The call premium covers the put, so entry is cheap, but a big rally is costly.
- Asset class
- Options
- Held for
- To expiry
- Data
- ARCANE has part of the data
- Symphony
- Cannot be built as a symphony
The rule
- Signal
- Bearish; accepts short-stock-like losses above the call strike for cheap downside exposure.
- Entry and exit
- Buy a put at a lower strike and sell a call at a higher strike, same expiry, near zero net cost. Close at expiry or when the fall has played out.
- Sizing
- 1:1 (one long put at the lower strike, one short call at the higher strike)
How it fails
- Loss is unlimited above the call strike
- Gain bounded by the stock reaching zero
- Flat zone between the strikes
- Call assignment and margin
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 bearish Call that a price breaks below a stated level. Paper only.
Requires a sold call and bearish exposure, not available long-only.
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, §2.13, p. 23 of the SSRN version. Described in our words. Trend is ARCANE’s filing, not the book’s.