Using Straddles to Trade Relative Volatility Between Products

Summary

The document raises the problem of expressing a view that volatility in one product will converge toward or diverge from volatility in another. The author seeks a relatively simple position with one execution per leg, rather than repeatedly delta-hedging, and asks whether buying a straddle in one market while selling a straddle in another could serve as an approximate volatility spread.

It frames the trade as a possible mean-reversion strategy between correlated markets, while noting that few markets offer dedicated volatility products. However, this is an unanswered question rather than a developed method: it supplies no option-selection rules, hedge ratios, pricing analysis, backtest, or performance evidence. A reader should therefore treat the proposed straddle pairing as an idea to investigate, not as a validated trade. The document does not address differences in contract terms, expiries, volatility exposure, or directional sensitivity between the two legs.

Key ideas

• The author is interested in trading relative volatility across correlated products.
• A paired long and short straddle is proposed as a simple two-leg expression.
• The desired approach avoids ongoing delta hedging.
• The document offers a question rather than analysis or evidence that the trade works.

Tags

# How To Construct A Volatility Spread Position?


# How To Construct A Volatility Spread Position?












Is there a simple way to spread the volatility of one product against another? By simple I mean one trade executed on each leg rather than constant delta hedging.

I can see a lot of opportunity for mean reversion trades in volatility between correlated markets but very few markets have underlying volatility products.

Would buying a straddle in one and sell a straddle in another (although not an exact replication) still be close enough to exploit a convergence/divergence in volatility between the two products? Any other ways to go about it?

Regards Tom

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.