Pairs Trading Options and Option–Underlying Relationships

Summary

The document asks whether pairs trading can be applied to related options or to an option and its underlying asset. The proposed idea is to trade a stationary linear combination over short horizons, where changes in delta and time decay may have less influence. The question contrasts this approach with options statistical arbitrage strategies that focus on buying or selling volatility.

The response says option pairs trading exists, but describes examples in equities, rates, and foreign exchange as discretionary rather than systematic. It mentions VIX versus VSTOXX and SPX versus NDX as pairs that have attracted attention. These examples establish that related market exposures have been traded against each other, but they do not specify an option-pair construction, a stationarity test, entry and exit rules, or performance results. The document therefore offers context rather than a replicable strategy. Its examples do not resolve whether a systematic options approach is viable, or how to control for changing Greeks, liquidity, and other risks.

Key ideas

• Pairs trading can be framed as trading a stationary linear combination of related securities.
• The question considers pairing options with other options or with their underlying assets.
• The response characterizes cited cross-market pairs as discretionary rather than systematic.
• The document gives no tested construction, trading rules, or performance evidence for options pairs.

Tags

# Pairs trading on two options or option and underlying?


# Pairs trading on two options or option and underlying?












I have been looking into pairs trading strategies (stationary linear combination of multiple securities) for options. Multiple related options or option and underlying over small periods of time such that change in delta and time decay don't become a significant factor.

I can not find any literature around this for options. It seems like everyone doing stat arb in options is basically selling/buying volatility. Is there any particular reason for not pair trading options? Could someone please point me to relevant literature? Thanks.

## Answer by user42108 (score 1)

https://quant.stackexchange.com/a/58737

I can not find any literature around this for options...Is there any particular reason for not pair trading options?

There is pair trading in options but from what I've seen for equities (and rates and FX) it's discretionary rather than systematic. Examples: VIX vs. VSTOXX was a popular trade for a long time; SPX vs. NDX has recently got attention.

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