TradeStation ADE Indicators and Dispersion Trades

I downloaded TradeStations ADE library of functions and indicators and created a tool to transfer Implied Volatility data of one symbol into the chart of another. From that point one can measure say the ratio of IV’s of a security and its index. Dispersion trading is based on the idea that there is a relationship between an index vol and its constituents. If these prices deviate there should be an opportunity to sell the expensive option and buy the cheap one.

Most of the material I have read on this strategy is of the sell index vol, buy security vol variety. The reason for this makes a lot of sense, index vol is usually overpriced to realized vol. and since short vol is an unlimited risk position, index options do not have the event risk of individual names. However event risk can create the magnitude of deviations where short dispersion becomes attractive. Remember that most players utilizing these ‘advanced’ strategies have to put a lot of money to work and so are at a disadvantage to faster, more nimble traders.

The first step is to install the ADE library and EL Collections which can be found at www.tradestation.com

Next open two chart windows, one with each symbol. In one window, insert the analysis technique “ADE – Implied Vol”

In the other window, insert the analysis technique “ADE – IV Comparison”. Set the inputs to the symbol in the window with ADE-Implied Vol. The ratio set to true plots the ratio of the IV’s of both symbols, false will plot the IV series of the other symbol.

ScreenHunter_03 Oct. 11 18.29

This analysis technique can probably be used to calculate and pass a basket of IV’s, measure weighted correlations, etc. If you have any questions, please post in the comment section. Enjoy.

ADE IV INDICATORS

Advertisements

~ by largecaptrader on October 11, 2009.

One Response to “TradeStation ADE Indicators and Dispersion Trades”

  1. Hi largecaptrader.
    Do you have an email address where I can send you a private message?
    Thanks

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

 
%d bloggers like this: