Short SPX Calls

Many of the strategies I utilize or investigate tend to be correlated with short volatility strategies or perform in ‘stable’ markets and performance tends to deteriorate in risk-off phases. Additionally many long-short or qualitative managers short an index or ETF like SPY or IWM’s when they feel it necessary to have something on the other side with lack of an alpha short. In looking to hedge some of these strategies I always wanted to consider shorting index calls as a way to perhaps take in some premium as well as be short delta and to see if it outperformed a naive short index ETF. Historical IV is sometimes difficult to obtain so I’m hoping this is a valid workaround, see if this makes sense to you:

BXM returns = (SPX ret) + (Short Call ret)


Short Call ret = BXM returns – SPX returns

Short Call Strategy

Taking this  step further we might be able to combine the Short Call with CBOE PUT index and get the return stream for short SPX straddle? I thought the curve would look slightly better though I guess this doesn’t take into account any delta hedging.

Short SPX Straddle

Instead of hedging, maybe it makes more sense to adjust the position size? Here’s a simple strategy on XIV that reduces exposure based on Draw Down and adds back at new equity highs:

XIV rebal


On a somewhat separate note, I came across an interesting fund while reading Futures Magazine entitled ESULEP:



I had originally assumed it was a short volatility fund but then I realized the performance through 2008 as well as August of 2009 was positive. The article states they assume each position to be wrong and hedges ahead of time and that it is a directional based system. I would be very interested in any comments or learning more about the hedging technique as I am jealous of the equity curve!


~ by largecaptrader on January 2, 2014.

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