I found two highly correlated assets that have spread in 3M realized and implied vol at historical minimum. To go long on this spread I thought of using two variance swaps.

Would it be cheaper to use two straddles instead? How would I price the variance swaps and how would correlation between the two assets enter my payoff? Finally, should I match the vega or variance notional and what would be an appropropriate strike?

  • $\begingroup$ When it comes to this topic I like this paper: wwwf.imperial.ac.uk/~ajacquie/index_files/… $\endgroup$
    – Vitomir
    Jul 9 '19 at 7:54
  • $\begingroup$ Before trying to answer your question, can you say more about the assets, and also the currency denomination of the assets? For instance, are the assets single name stocks, or equity indexes, are they denominated in different currencies, how liquid is the options markets of these two assets? $\endgroup$ Jul 9 '19 at 8:32
  • 1
    $\begingroup$ the assets are two currency cross denominated in USD. Options are not so liquid $\endgroup$
    – lokaire
    Jul 10 '19 at 20:55

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Browse other questions tagged or ask your own question.