Strategy lab
Every strategy from 151 Trading Strategies and all 101 Formulaic Alphas as formulas you can edit and backtest on ten years of daily stocks, ETFs, futures, forex and crypto data. Free, in your browser.
7.4.1VolatilityChart
Volatility risk premium with gamma hedging
Delta-hedging the short straddle turns it into a pure bet that realised volatility comes in below implied. The chart shows that spread: the VIX minus the volatility the S&P 500 then delivered.
Note. Positive values are months in which a delta-hedged short straddle would have earned money.
Edit anything; the result updates as you type. Lines like window = 20 become sliders.
Hypothetical backtests on daily closes with no slippage unless you add costs. Survivorship bias applies: the stock list is today’s large caps. For learning, not investment advice. Data: Yahoo Finance via yfinance.
- Source
- 151 Trading Strategies
- Section
- 7.4.1 · Volatility
- Asset class
- Volatility
- In the lab
- Charted over time
Volatility risk premium with gamma hedging (7.4.1)
Delta-hedging the short straddle turns it into a pure bet that realised volatility comes in below implied. The chart shows that spread: the VIX minus the volatility the S&P 500 then delivered.
Key equation
Lab formula
// VIX a month ago minus the realised volatility over the following month (vol points)
horizon = 21
delay(of("^VIX", close), horizon) - of("SPY", stddev(returns, horizon)) * sqrt(252) * 100Positive values are months in which a delta-hedged short straddle would have earned money.
More in Volatility
- 7.2 VIX futures basis trading
- 7.3 Volatility carry with two ETNs
- 7.3.1 Hedging short VXX with VIX futures
- 7.4 Volatility risk premium
- 7.5 Volatility skew – long risk reversal
- 7.6 Volatility trading with variance swaps
Source: Kakushadze, Z. and Serur, J. A. (2018). 151 Trading Strategies. Palgrave Macmillan. SSRN 3247865. Summaries are our own.