So this experiment mainly just uses the straddle costs as the index itself that we make trading decisions around, but we don’t actually trade the index itself, much like the VIX.
It’s easy to track the continuous delta-hedged straddle as a programmatic index, but this would be very difficult to trade due to ho…
So this experiment mainly just uses the straddle costs as the index itself that we make trading decisions around, but we don’t actually trade the index itself, much like the VIX.
It’s easy to track the continuous delta-hedged straddle as a programmatic index, but this would be very difficult to trade due to how often you would need to hedge. In code, it just takes the price of the newest ATM strikes without factoring in costs like closing the position and entering a new one.
If revisited to actually trade based on a threshold, the issue that we run into is a slow negative PnL drag from the transaction costs as realized volatility stays lower, the PnL would look just like the VIX (trending downwards with occasional large up moves) — so, a threshold based approach could work, but it wouldn’t be optimal and is better to just make decisions based on the index values
Ah, I see what you’re saying.
So this experiment mainly just uses the straddle costs as the index itself that we make trading decisions around, but we don’t actually trade the index itself, much like the VIX.
It’s easy to track the continuous delta-hedged straddle as a programmatic index, but this would be very difficult to trade due to how often you would need to hedge. In code, it just takes the price of the newest ATM strikes without factoring in costs like closing the position and entering a new one.
If revisited to actually trade based on a threshold, the issue that we run into is a slow negative PnL drag from the transaction costs as realized volatility stays lower, the PnL would look just like the VIX (trending downwards with occasional large up moves) — so, a threshold based approach could work, but it wouldn’t be optimal and is better to just make decisions based on the index values
Thanks got it now....will be trying using this for determining entry and exit points for short straddles and more