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Mistro


Total Posts: 21
Joined: Aug 2018
 
Posted: 2019-06-26 09:32
Hello,

I would like to do volatility pairs trade on the DAX and SPX. I will be shorting the SPX ATMF straddle on the US exchange and buying the DAX ATMF straddle on the Borse Frankfurt. My base currency for my account is Euro.

My original thought was this trade is also short the USDEUR volatility. To hedge my currency risk, I would need to buy a straddle on the USDEUR. However, I have much smarter people than myself saying that is not the case.

Would someone mind clarifying this for me with some additional colour on how I might structure the trade (to hedge currency risk)?

Thank you.

men lie, women lie, numbers don't

ronin


Total Posts: 479
Joined: May 2006
 
Posted: 2019-06-26 13:29
> My original thought was this trade is also short the USDEUR volatility

It's not.

Think about the limit when neither dax nor spx have any volatility, and they only move around because of currencies. Dax becomes eur, spx becomes usd.

Your short spx straddle means you sell usd put (eur call), sell usd call (eur put).

Your long dax straddle means you buy eur put (usd call), buy eur call (usd put).

Geddit?


"There is a SIX am?" -- Arthur

Mistro


Total Posts: 21
Joined: Aug 2018
 
Posted: 2019-06-26 20:21
I believe I am starting to see the light now. At inception, would I have to buy notional amount of USD for the SPX?

Say I am long 1 straddle DAX
Short 1 straddle SPX (2900.xx)

Would I need to buy 290,000 USD to lock in the current rate?

men lie, women lie, numbers don't

Strange


Total Posts: 1578
Joined: Jun 2004
 
Posted: 2019-06-27 01:08
Well, try to think about it - if nothing moves and both straddles expire worthless, what's your currency exposure?

“My dear, here we must run as fast as we can, just to stay in place. And if you wish to go anywhere you must run twice as fast as that.”

ronin


Total Posts: 479
Joined: May 2006
 
Posted: 2019-06-27 15:15
> Would I need to buy 290,000 USD to lock in the current rate?

In the immortal words of @strange, no.

When you sell the spx straddle, you get some usds for it. They are sitting in your account. Buying more usds only gives you more usds in your account.

But then, you also have a usd liability. The short straddle. They kind of match, no?

"There is a SIX am?" -- Arthur

Strange


Total Posts: 1578
Joined: Jun 2004
 
Posted: 2019-06-27 19:57
To be fair, it will depend a little on what ratio you are doing the trade - I assume you are trading this theta-neutral?

“My dear, here we must run as fast as we can, just to stay in place. And if you wish to go anywhere you must run twice as fast as that.”

Mistro


Total Posts: 21
Joined: Aug 2018
 
Posted: 2019-06-27 23:10
@strange, I sent you an email to your protonmail


men lie, women lie, numbers don't

Mistro


Total Posts: 21
Joined: Aug 2018
 
Posted: 2019-06-27 23:17
Thanks ronin for your help!

men lie, women lie, numbers don't
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