The Skinny On Options Data Science

Hedging a Large Account (w/ Spreadsheet)

The Skinny On Options Data Science

SPREADSHEET LINKS
For the Windows version, click HERE
For the Mac version (or those without thinkorswim), click HERE

Note: You will need Microsoft Excel for the spreadsheet to work correctly. Prices will automatically update only for those running thinkorswim and only for those using the Windows operating system.


SUMMARY
The head of our research team, Michael Rechenthin, Ph.D., (aka Dr. Data) created a downloadable spreadsheet (both a Windows version and a Mac version) that will work with the thinkorswim platform and can help you with either your hedging needs or in constructing a Pairs Trade. Dr. Data first explains dollar weighted hedges and Implied Volatility (IV) hedges and how they perform differently. He then explained how to use the spreadsheet and how it could be used.

Mike first explained a dollar weighted hedge (or dollar weighted pairs trade) and provided the formula. The example was of SPY at $215/share and IWM at $124/share. $215 multiplied by 100 shares and then divided by $124 results in just over 173, so it takes 173 shares of IWM to hedge or match up in a pairs prade with SPY. He then noted that although the correlation was very high at 0.90 the Russell 2000 has a higher IV than the S&P 500. Dr. Data then provided the formula for an IV weighted hedge (or pairs trade). The result was that one would use 125 shares of IWM to offset 100 shares of SPY. A final slide showed a graph of both a dollar weighted hedge and an IV adjusted one using a short term bond versus a long term bond. The IV adjusted duo was much more stable.

The rest of the segment was all about Mike’s spreadsheet. The Windows version only requires you to enter the symbols and position size that you want hedged. The Mac version requires you to enter more fields. Both Futures and equities (including ETFs) can be plugged into the spreadsheet. Prices, IV and the resulting figures work dynamically in the Windows version. It is elegant in its simplicity and every trader will find it very helpful.

Watch this segment of Skinny on Options Data Science with Tom Sosnoff, Tony Battista and Dr. Data, aka Michael Rechenthin, Ph.D., for a better understanding of dollar weighted hedging, IV adjusted hedging and for a “game changer” downloadable spreadsheet which traders can use to calculate hedges or share amounts for pairs trades.

The Skinny On Options Data Science More installments

See All »

Latest tastytrade Videos As of February 24

Most Shared From the last 30 days