Strategies · Library · Volatility
§7.5Volatility
Volatility skew - long risk reversal
Puts far from the money usually cost more than matching calls. Buy the call and sell the put to capture the skew. It is really a bullish bet that loses if the index falls enough.
- Asset class
- Volatility
- Held for
- Weeks
- Data
- Needs data ARCANE lacks
- Symphony
- Cannot be built as a symphony
The rule
- Signal
- Implied volatility of a put against a call at equal distance.
- Entry and exit
- Open the combination; hold to expiry.
- Sizing
- Single structure, equal-premium style.
How it fails
- Directional loss in a sell-off
- Assignment risk
- Margin
Data it needs
- option prices
No options data.
How ARCANE uses it
A bullish Call could be expressed as this payoff, paper only.
Requires 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, §7.5, p. 85 of the SSRN version. Described in our words. Volatility is ARCANE’s filing, not the book’s.