Trading Strategy Index

Trading Strategy Index

Strategy indices are indices that track the performance of an algorithmic trading strategy. The algorithm clearly and transparently specifies all the actions that need to be taken. The following are examples of algorithms that strategies can be based on.

1) Pairs trading strategy. This strategy examines pairs of instruments that are known to be statistically correlated. For example, consider Shell and Exxon. Both are oil stocks and are likely to move together. Knowledge of this trend creates an opportunity for profit, as on the occasions when these stocks break correlation for an instant, the trader may buy one and short sell the other at a premium.

2) Fed funds curve strategy This strategy takes a view on the shape of the curve based on the actions of the Fed. In this strategy, one puts on a steepener or flattener, based on whether the Federal Reserve has cut the benchmark rate or raised it. This is based on the conventional wisdom that the curve steepens when the rate is expected to be cut and vice versa.

3) Implied volatility against realized volatility . In a number of markets such as commodities and rates, the implied volatility, as implied by straddle prices is higher than the realized volatility of the underlying forward. One way to 'exploit' this is to sell a short expiry (e.g. 1 month) straddle and delta-hedging it until it is alive. The strategy makes money if at expiry, the sum of the premium received (and accrued at money market), the (negative) final value of the straddle and the (positive/negative) value of the forwards (entered into to delta-hedge the straddle) is greater than zero. A variation of this, and more common solution in equity, is to sell either a one-month or three-month variance swap – usually on the Eurostoxx 50E or S&P500 index – that pays a positive performance if the implied volatility (strike of the swap) is above the realised volatility at expiry; in this case there is no need to delta-hedging the underlying movements.

Read more about Trading Strategy Index:  Selling Strategy Indices, Trades That Can Be Structured On These Indices, Financial Institutions That Have Bought These Products, Financial Institutions Selling These Products, Disadvantages and Pitfalls

Other articles related to "trading strategy index, trading strategy, strategy":

Trading Strategy Index - Disadvantages and Pitfalls
... products, strategies that involve trading strategy indices have burnt the fingers of many a pension fund and small bank ... simplest argument against these strategies would be this If the strategy is expected to be very profitable, the only eyes that it would catch would be the proprietary desks of these investment banks ... For example, the fed funds curve strategy actually ends up being behind the curve as it takes action based on what the fed has already done – this implies that the ...

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