MA and C Trade

I talked about a volatility pairs trade in my last post, and I got a great response on it. Therefore, I am going to take a look at another one. MA (Mastercard) and C (Citigroup) are two stocks that are both in the banking/Financial industry. Both of their earnings reports have also been released, so there volatility is not pumped because of the binary event risk. However, both their volatilities are at extremes, and these stocks have a correlation of (.63).

As you can see, C has a very high IV Rank, and MA has a very low IV Rank; therefore, they are both at volatility extremes. However, if you look up top there is another indicator that shows both at very different extremes. This is a model I have built that looks into volatility extremes. When the blue line is equal to green the model is telling me that it is more advantageous to buy volatility, and red means it is more advantageous to sell volatility. In this case, the model is looking more medium term extremes, and as shown above MA is a great long volatility play, and C is a great short volatility play. This indicator is what interests me instead of IV Rank when it comes to volatility pairs trades.

Now there were a couple of trades I was looking at to put this on. The first one was selling a Citigroup iron condor (.61 credit) 3x MA, and buying a MA iron condor (1.44 debit). However, I do not like that trade because also like to play these directionally. Instead, I was looking to sell a put spread in C and buying a put spread in MA.

Position I will try to take:
C Strikes: Short 47/Long 45 MAR 14 .75 credit (2x MA)
MA Strikes: Long 77.5/Short 75.5 MAR 14 1.08 Debit (1x)

This overall position is then short volatility and long delta in C. It is also short delta in MA and long volatility. However, I did sell more C put spreads than I bought MA put spreads. The reason for this is I prefer to be overall short volatility when I do this, due to my general short volatility bias. However, I wish to know what the overall position risk looks like, so I understand I am setting up the trade properly. I do this by beta weighting the positions against the SPX, and then looking at what those overall trades look like against an index.

Below is the SPX beta weighted position of C and MA:

I will be looking to put this trade on monday morning. The mechanics for me is to let the trade sit, and find a time to manage the winner, as you can not hedge an already hedged position (it is hedged because it is a pair). However, if you do this trade you have to STAY SMALL! You need to give this strategy time to work for you. GOOD LUCK TRADING!