this question can turn out to be very basic but its something that has been bugging me.
Say I want to buy/sell an option on A vs sell/buy an option on B. Facts I know
- A and B are different underlyings but do have some "beta" between them with a correlation of say 65%, the beta is 1.3 on changes ( i.e. change in A = 1.3* change in B)
- IV_A/IV_B = 1.15
- IV_A / HV_A = 1.3 (implied vol is 10% above 20d historical realized vol) and IV_B/ HV_B = 1.1
So my confusion is Looking at 1) and 2) I think I should be buying option on A, vs selling on B Looking at 3) I should be selling option on A, vs buying on B
What should the right trade be?