Can we sell strangles in SPY and buy them in another index like DIA to take advantage of their IV difference?Study
- 2005 - Present
- 16 Delta Strangles
- 45 DTE
- Held to Expiration
- Sold a Strangle in SPY while simultaneously buying a Strangle in DIA of the same delta, thus hedging the directional exposure.
We find that, like pairs trades, this strategy reduces volatility and average P/L. Less risk, less reward. However, the nuisances of management, extra legs, transaction costs, etc. do not warrant the benefit of reducing risk and reward. If you want to reduce risk and reward, trade small or defined risk strategies.