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Minyan Mailbag: Trading From the Long and the Short Side


Salesmanship creates opportunity, but that opportunity comes seldom and quickly.

Professor Succo,

Obviously there are a lot of differences between trading from the long and the short side, most notably 1) psychology and 2) the difficulty maintaining a long-term short position in the face of constant salesmanship from Wall Street.

Equally debilitating are the effects of theta working against defined risk shorts via puts.

Have you studied pairs trading with theoreticals like the current situation where the Russell (RTY) is heavily overbought, e.g. selling options on one and buying on the other?


Minyan Ron


Trading long/short pairs is in reality trading volatility: the movement of assets. It is a "short" convexity strategy by its very nature and in the way inevitably it is unwound.

We are short RTY and long SPX is an offensive trade as well as an overlay to our long convexity stock positions. Around that we have an objective to buy convexity in RTY and sell a portion in SPX. This reduces somewhat the short convexity nature of the trade, but we don't want to eliminate it entirely because of our long convexity profile in our overall portfolio.

As far as managing our short delta profile against long convexity, we certainly have our periods of pain, but we try to manage them. We do so by not having large delta positions initially, thus letting our gamma take us into those delta positions. We tend to try to buy more convexity in names we are negative on fundamentally, both micro and macro based.

The salesmanship creates opportunity, but that opportunity comes seldom and quickly.

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