This paper examines the relative value in and opportunities of gamma trades in equity options markets. It has been well documented in the literature that shorting index options straddles, with or without delta hedging, tends to produce positive expected returns, albeit at the expense of very high risks. Buying all the single name straddles against the short index straddle, a popular strategy known as “dispersion trade”, has been shown to significantly improve the risk return profile in other applied work. This strategy is well known to be related to the fact that implied correlation is often priced excessively high. Most econometric work highlighting these options strategies were conducted in the late 90´s and early 2000´s, before the 2008 financial crises and 20220 Covid crisis, and since then their attractiveness have been substantially mitigated. Dispersion trades usually assign market index weight to each single name straddle, without considering the relative value opportunities among them, ignoring the fact that some single name implied volatilities might be overpriced, and others underpriced. We suggest a measure for the relative price of gamma trades and hedge ratios to optimally allocate among single name straddles. We use this relative pricing to build a dynamic long/short gamma strategy which favors the “cheaper” straddles and avoid the “expensive” ones at any point in time. This significantly improves the risk return profile when compared to dispersion trades in the S&P500 market. Finally, we conduct a broad screening of all the worldwide equities indices and subindices where historical implied volatility is available to indicate where opportunities for our dynamic long/short gamma strategy appear very promising.
Comissão Organizadora
Anderson Odias da Silva
Claudia Yoshinaga
Ricardo D. Brito
Felipe Saraiva Iachan
Vinicius Augusto Brunassi Silva
Complete tool for submission, evaluation and publication of proceedings for scientific events.
