Beruflich Dokumente
Kultur Dokumente
(sell correlation)
(buy correlation)
Index Arbitrage:
Reconstruct
an index product (ETF)
using the
component stocks
*
*
*
*
Index
Stock 3
Stock 2
Stock 1
Dispersion Trading:
Reconstruct an index option
using options on the
component stocks
COMS
COMS
ADPT
ADPT
ADCT
ADCT
ADLAC
ADLAC
ADBE
ADBE
ALTR
ALTR
AMZN
AMZN
APCC
APCC
AMGN
AMGN
APOL
APOL
AAPL
AAPL
AMAT
AMAT
AMCC
AMCC
ATHM
ATHM
ATML
ATML
BBBY
BBBY
BGEN
BGEN
BMET
BMET
BMCS
BMCS
BVSN
BVSN
CHIR
CHIR
CIEN
CIEN
CTAS
CTAS
CSCO
CSCO
CTXS
CTXS
CMGI
CMGI
CNET
CNET
CMCSK
CMCSK
CPWR
CPWR
CMVT
CMVT
CEFT
CEFT
CNXT
CNXT
COST
COST
DELL
DELL
DLTR
DLTR
EBAY
EBAY
DISH
DISH
ERTS
ERTS
FISV
FISV
GMST
GMST
GENZ
GENZ
GBLX
GBLX
MLHR
MLHR
ITWO
ITWO
IMNX
IMNX
INTC
INTC
INTU
INTU
JDSU
JDSU
JNPR
JNPR
KLAC
KLAC
LGTO
LGTO
LVLT
LVLT
LLTC
LLTC
ERICY
ERICY
LCOS
LCOS
MXIM
MXIM
MCLD
MCLD
MEDI
MEDI
MFNX
MFNX
MCHP
MCHP
MSFT
MSFT
MOLX
MOLX
NTAP
NTAP
NETA
NETA
NXTL
NXTL
NXLK
NXLK
NWAC
NWAC
NOVL
NOVL
NTLI
NTLI
ORCL
ORCL
PCAR
PCAR
PHSY
PHSY
SPOT
SPOT
PMTC
PMTC
PAYX
PAYX
PSFT
PSFT
PMCS
PMCS
QLGC
QLGC
QCOM
QCOM
QTRN
QTRN
RNWK
RNWK
RFMD
RFMD
SANM
SANM
SDLI
SDLI
SEBL
SEBL
SIAL
SIAL
SSCC
SSCC
SPLS
SPLS
SBUX
SBUX
SUNW
SUNW
SNPS
SNPS
TLAB
TLAB
USAI
USAI
VRSN
VRSN
VRTS
VRTS
VTSS
VTSS
VSTR
VSTR
WCOM
WCOM
XLNX
XLNX
YHOO
YHOO
NASDAQ-100
Index (NDX)
and ETF (QQQ)
QQQ ~ 1/40 * NDX
Capitalization-weighted
QQQ trades as a stock
QQQ options: largest daily
traded volume in U.S.
SOX
XNG
XOI
ALTR
AMAT
AMD
INTC
KLAC
LLTC
LSCC
LSI
MOT
MU
NSM
NVLS
RMBS
TER
TXN
XLNX
APA
APC
BR
BRR
EEX
ENE
EOG
EPG
KMI
NBL
NFG
OEI
PPP
STR
WMB
AHC
BP
CHV
COC.B
XOM
KMG
OXY
P
REP
RD
SUN
TX
TOT
UCL
MRO
Stock 1
Stock 2
Scenario 2
2.5
2
1.5
1.5
0.5
standard move
standard move
0
-0.5
-1
-1.5
-2
1
0.5
0
-0.5
-1
-1.5
-2
-2.5
-3
10
11 12 13 14 15
10
11
12
13
14
15
stock #
stock #
M
i =1
wi Si
K=
j =1
max (I K ,0 )
wi Ki
M
j =1
C I (I , K , T )
M
j =1
wi max (Si Ki ,0 )
wiCi (Si , Ki , T )
IVH:
premium from index
is less than premium
from components
Super-replication
Makes sense for deep-in-the-money options
M
i =1
ij 1
wi Si (T ) =
1
2
i N i i2T
i =1
wi Fi e
N i N = standardiz ed normal
K=
Solve for X in :
Similar to
Jamshidian (1989)
for pricing bond
options in 1-factor
model
1
2
i X i2T
i =1
wi Fi e
1
2
i X i2T
Ki = Fi e
Set :
max (I (T ) K ,0) =
M
i =1
wi max (Si (T ) Ki ,0 ) T
K i = Fie
1
2
i X T i2T
X =
X =
i T
1
i T
ln
Ki
1
+ i T
Fi
2
ln
Fi
1
i T = d2
Ki
2
N (d 2 ) = constant
Hedged option
!
" # $" # %" & $" & %" ' $" ' %(") $ $" ) $ %") ) $") ) %" ) * $") * %") + $
S
n=
,
S t
NV = normalized Vega =
n ~ standardized move
M
i =1
pi i
pi =
ni
wi Si
M
j =1
I2 =
wjS j
pi p j i j ij
ij=1
Index P/L = I
M
i =1
pi2 i2
2
I
(n
2
i
1) + I
pi p j i j
i j
I2
(n n
i
ij )
i +
pi2 i2
I2
i =1
I (ni2 1) + I
pi p j i j
i j
I2
(n n
i
ij )
off-diagonal term:
realized cross-market
movements vs.
implied correlation
diagonal term:
realized single-stock
movements vs.
implied volatilities
D2 =
N
i =1
P/L =
N
i =1
N
i =1
Si
I
, Y=
Si
I
pi i2 ni2 I2 n I2
i =1
Xi =
i =1
D2 =
pi ( X i Y )
N
i =1
i (ni2 1) + I (nI2 1)
i ni2 + I nI2
i ni2 +
I
I2
N
i =1
pi i2 ni2
N
i =1
I
I2
N
i =1
i + I
pi i2 ni2 + I nI2
I pi n
+ i ni2 I2 D 2
2
I
I
2 2
i i
+ i ni2 I2 D 2
2
I
I
Gamma P/L =
i =1
Idiosyncratic
Gamma
Dispersion
Gamma
Time-Decay
i = I
pi i2
pi i2
= I
I2
I2
1 I
pi i
i
I2
1 > 0
30
25
20
130
15
120
110
10
100
70
130
115
120
125
100
105
110
85
90
80
95
70
75
80
90
25
20
15
10
5
130
120
110
10 0
90
70 75 80
85 90
95 100
105 110
115 120
125 130
80
70
10.31130 -2.29
125
120
115
110
1 = 30%
2 = 40%
12 = .5
105
100
95
90
5.80
85
20.49
80
75
-6.80 70
75
80
85
90
95
100
105
110
115
120
70
130
125
+7.88
I
I
Y=
pi ( X i Y )
i =1
ex
-0.15
D=
Si
Si
in d
-0.08
-0.01
0.06
0
0.13
0.07
0.012
1.21
norma lized
dispersion
0.3
Xi =
D /Y 2 =
pi ( X i / Y 1)
i =1
10
Vega Risk
Sensitivity to volatility: move all single-stock implied volatilities
by the same percentage amount
Vega P/L =
Vega j j + Vega I I
j =1
M
j =1
(NV ) j
M
j =1
+ (NV )I
( NV ) j + (NV )I
NV = normalized vega =
100
95
90
85
80
75
vol % multiplier
130%
120%
110%
90%
100%
80%
70%
70
Market level
130%
105
100%
110
market level
115
20
19
18
17
16
15
14
13
12
11
10
9
8
7
6
5
4
3
2
1
0
85%
120
70
70%
125
130
125
120
115
110
105
100
95
90
85
80
75
130
115%
Market/Volatility Risk
Vol % multipler
11
M
ij =1
i j
pi p j i j ij +
i j
pi p j i j
I2 = ( I(1) ) ( I( 0 ) ) ,
2
I(1) =
j =1
p j j ,
I(0 ) =
j =1
p 2j 2j
1 ( I(1) ) ( I(0 ) )
2
I2
2
(1)
( 0)
1
(NV )I ( I ) 2( I )
2
I
2
Correlatio n P/L =
1 ( I(1 ) ) ( I(0 ) )
2
I2
2
Rega =
(NV )I
Market/Correlation Sensitivity
130
125
5.1
4.8
4. 5
4. 2
3.9
3.6
3.3
3
2.7
2.4
2.1
1.8
1.5
1.2
0.9
0. 6
0. 3
0
120
115
110
105
100
market level
95
90
85
130
80
corr change
75
70
0.3
0.2
0.1
-0.1
-0.3
market level
-0.2
0. 2
70
0. 3
0.1
90
-0.1
-0. 3
-0.2
110
corr change
12
Entering a trade
dX = dW + B dt
time
13
dX = dW + B dt
p1
p2
p3
time
Computation of weights:
Max-Entropy Method
Market prices
of single-stock
options
Risk-neutral
pricing probabilities
cash-flow matrix
14
impliedvol
40.00
BidVol
AskVol
ModelVol
RHO=1
30.00
20.00
10.00
0.00
360
380
400
420
440
460
Vol
Bid
Ask
Model
0
440 445 450 455 460 465 470 475 480 485 490 495 500 505
Index Strike
15
Bid
Ask
0
52
51
0
50
0
49
0
48
0
47
0
46
0
45
44
43
Model
Vol
Index Strike
Vol
25
Bid
20
Ask
15
Model
10
5
0
430
440
450
460
470
480
490
500
510
520
530
Index Strike
16
Vol
25
Bid
Ask
20
15
Model
10
5
0
420
440
460
470
480
490
500
510
520
530
540
Index Strike
N
j =1
p 2j 2j +
i j
pi p j i j ij
(*)
17
Steepest-Descent Approximation
Define a risk-neutral 1-factor model
for the index process
dI
= I (I , t )dW + I (I , t )dt
I
I2 (I , t ) = E
j (S j (t ), t ) k (Sk (t ), t ) jk p j pk
jk =1
w j S j (t ) = I
j =1
I2 (I , t )
N
ij=1
pi p j Si*S *j i (Si* , t ) j (S *j , t )
BidVol
AskVol
W MC vol
Steepest Desc
30
25
20
49
5
50
0
50
5
49
0
48
5
48
0
47
5
47
0
46
5
46
0
45
5
45
0
44
5
15
44
0
implied vol
35
strike
18
BidVol
AskVol
W MC vol
Steepest Desc
30
25
20
0
52
0
51
50
0
49
0
48
0
47
0
46
45
0
44
15
43
implied vol
35
strike
19
ROI May01-Oct02
$1.65
$1.60
$1.55
$1.50
$1.45
$1.40
$1.35
$1.30
$1.25
$1.20
$1.15
$1.10
$1.05
$1.00
$0.95
$0.90
$0.85
$0.80
$0.75
$0.70
$0.65
$0.60
$0.55
$0.50
Gargoyle
Dispersion
Fund
-0
2
ct
O
02
p02
gAu
Se
-0
2
l -0
2
Ju
Ju
n
02
02
M
ay
-
-0
2
pr
A
ar
M
2
Fe
b02
c01
Ja
n0
De
-0
1
v01
ct
O
No
01
-0
1
g-
Au
ep
l -0
1
-0
1
Ju
ay
M
Ju
n
01
$1
O ct-02
-10.87%
Se p-0 2
Au g- 0 2
0.66%
-16.17%
-7.79%
-8.49%
-7.12%
J u l- 0 2
Ju n - 0 2
5.20%
-0.74%
-2.04%
Ma y- 0 2
-6.06%
A pr- 0 2
M a r- 0 2
Fe b-0 2
N o v- 0 1
3.27%
3.76%
-1.02%
-1.93%
S&P 500
6.09%
-1.46%
Ja n - 0 2
Dec-01
0.49%
0.88%
Ga rgoyle
Dispe rsion Fund
3.78%
7.67%
1.90%
O c t- 0 1
-8.07%
S e p-0 1
J u l- 0 1
1.82%
-0.98%
-7.56%
-2.43%
Jun- 0 1
M a y- 0 1
10.10%
0.67%
-1.38%
-15%
-10%
13.97%
9.18%
3.58%
-6.26%
Aug-0 1
-20%
12.54%
-3.17%
-5%
0%
5%
10%
15%
20%
20
35%
Volatility
Dow Industrial
Average (DJX)
Correlation
60%
Average Corr
Weighted Corr
50%
40%
30%
20%
10%
0%
De c
Ja n
Fe b
Ma r
Apr
Ma y
Jun
Jul
Aug
Se p
Oct
Nov
21
Volatility
Correlation
0.8
0.7
0.6
0.5
0.4
Average Corr
0.3
Weighted Corr
0.2
0.1
0
Dec
Ja n
Fe b
Mar
Apr
May
Jun
Jul
Aug
Se p
Oct
Nov
1.2
90
80
1
70
60
ImpliedCorr
Delta
50
0.6
40
BidRho
AskRho
Delta
30
0.4
20
0.2
10
0
02
/2
00
2
8/
2/
20
02
8/
4/
20
02
8/
6/
20
02
8/
8/
20
0
8/
10 2
/2
00
8/
12 2
/2
00
8/
14 2
/2
00
8/
16 2
/2
00
8/
18 2
/2
00
8/
20 2
/2
00
8/
22 2
/2
00
8/
24 2
/2
00
8/
26 2
/2
00
8/
28 2
/2
00
8/
30 2
/2
00
2
02
/2
0
7/
31
02
/2
0
7/
29
02
/2
0
7/
27
02
/2
0
7/
25
02
/2
0
7/
23
02
/2
0
7/
21
02
/2
0
7/
19
02
/2
0
7/
17
/2
0
7/
15
7/
13
/2
0
02
7/
11
Correlation
0.8
22
Conclusions
Dispersion trading: a form of ``statistical correlation arbitrage
Sell correlation by selling index options and buying options
on the components
Buy correlation by buying index options and selling options
on the components
``Convergence trading style.
Price discovery using model and market data on vol skews
Sophisticated trading strategy. Potentially very profitable,
with moderate (but not low) risk profile.
23