Strategies · Library · Indexes
§6.3.1Volatility
Dispersion trading – subset portfolio
A variant of §6.3 Dispersion trading in equity indexes
A cheaper version of dispersion that only buys straddles on a subset of stocks with options and low specific risk, using a smoother correlation model.
- Asset class
- Indexes
- Held for
- To expiry
- Data
- Needs data ARCANE lacks
- Symphony
- Cannot be built as a symphony
The rule
- Signal
- Same as dispersion, with a factor-model correlation matrix and a subset of stocks
- Entry and exit
- Same as dispersion, fewer long legs.
- Sizing
- Same sizing for the chosen subset
How it fails
- Correlation model error
- Short options risk
- Partial hedge
Data it needs
- inputs ARCANE does not hold
Needs options chains.
How ARCANE uses it
None yet: ARCANE does not hold the data this trades on.
Needs options.
Filed under the volatility card
Hold less after a month of high volatility and more after a calm one. The paper found this raised return per unit of risk, because volatile spells are not paid for with higher returns.
A paper plan from this card holds 5 to 63 days, stops at 2.5× the expected move and uses at most 50% of your risk budget. The card
Source: Kakushadze and Serur (2018), 151 Trading Strategies, §6.3.1, p. 79 of the SSRN version. Described in our words. Volatility is ARCANE’s filing, not the book’s.