5
$\begingroup$

The research paper "The Allegory of the Hawk and Serpent" describes an asset allocation referred to as the "Dragon" Portfolio, which allocates 18% to "active long volatility". The backtesting methodology to implement this strategy is described as:

We modeled the strategy as buying Equity volatility (via options) in the direction of the market after a move greater than +/- 5% in either direction over any rolling three months. The strategy, as presented, is intended to represent a profoundly simple (and less effective) replication of what Active Long Volatility managers do for their clients.

It also gives practical examples:

In our historical simulations, we sought to replicate an Active Long Volatility strategy by buying out-of-the-money equity put options if the market is down -5% or more and purchasing out-of-the-money equity call options if the market is up +5% or more over any rolling three months.

However, the paper does not state how far forward the expiration date should be on the purchased options nor does it say if the option position is liquidated if the market mean reverts below the 5% return threshold.

What is the specific trading algorithm for an "active long volatility" strategy?

Thank you in advance for your consideration and response.

$\endgroup$
1
  • 3
    $\begingroup$ From the context, and following common practice, these are most likely monthly options. And no, usually you do not sell the options in these kinds of strategies, you hold them to maturity. But there are many ways to do it, and you can make up your own rules. For more info on this specific strat you need to contact the authors, since "active, long volatility" is a very broad and vague category. $\endgroup$
    – noob2
    Apr 21 at 20:48

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.