Strategies · Library · Indexes
§6.3Volatility
Dispersion trading in equity indexes
Index options often price higher volatility than the stocks inside would justify. The trade buys straddles on the stocks and sells a straddle on the index, sized to match payoffs.
- Asset class
- Indexes
- Held for
- To expiry
- Data
- Needs data ARCANE lacks
- Symphony
- Cannot be built as a symphony
The rule
- Signal
- Index implied volatility versus implied from constituents and correlations
- Entry and exit
- Open near-the-money straddles, hold about a month to expiry.
- Sizing
- Shares-outstanding weighted straddle counts
How it fails
- Correlation spikes
- Short options risk
- Transaction costs
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, p. 78 of the SSRN version. Described in our words. Volatility is ARCANE’s filing, not the book’s.