Possible brainlet question bear with me. >Portfolio theory says you manage risk by buying an optimal portfolio and mixing it with risk-free investments >Optimize portfolio by maximizing returns at given risk >The more negatively correlated your assets the better your portfolio >Problem is most assets are positively correlated
BUT instead of doing all that, why wouldn't I just buy correlation swaps to directly hedge against correlation of exactly the assets I'm holding?
That way, I can hedge against correlated risk to the precise degree I like and I don't have to buy shitty government bonds with no returns.
So, let's assume I'm strongly risk-averse and would end up buying a larfe amount of risk-free bonds. Are you saying the opportunity costs would still be less than the price of the swaps to get the same risk level?
What if instead of buying swaps I sold call options on all the stocks in an ETF, then bought call options on the ETF? That way I'm also buying correlation and not paying a premium
Owen Walker
Generally if you see an obvious arbitrage opportunity like that it means there's some risk that you haven't accounted for.
Mason Thompson
What's the arbitrage? I'm obviously not making net profit if I'm buying and selling calls on the ETF and its constituent stocks in equal amounts. I'm just doing it to hedge against correlation, so I can buy the highest-return stocks without having to add in worse performers for the sake of diversification.
John Diaz
I don't understand are you talking about, this doesn't sound like biz
Selling call options? Are you implying that you would actually write options? or did you perhaps mean to say you'd sell puts on all the stocks in an ETF? Come to think of it, this may actually be a pretty neat idea. Buying calls on an ETF, then buying puts on each stock at an equal amount you could perhaps ensure a profit? As not every stock within the ETF will go up, buy the ETF itself will most likely go up...
Ryder Gonzalez
kek
Aiden Adams
Yes sorry I mean buying puts on the stocks and calls on the ETF, not even necessarily to make profit (although I guess it could be profitable?) but also to buy correlation so I can hold the same stocks myself in greater amounts instead of buying worse stocks just for the negative correlation so I'm diversified.
