”I thought your strategy was to sell the less volatile FTSE and buy a half-basket of (relatively ) more volatile FTSE constituent shares ?”
The other way around – buy the FTSE vol, sell constituent Vol, otherwise known as -dispersion/+correlation. What you describe is a +dispersion/-correlation trade – the Dax looks a good candidate for that.
”I had , like spreadrisk, assumed that you wanted to approximate the FTSE weighting with the stock as much as is possible with a small subset of the 100 FTSE shares. Volatility is important but so are other factors. ”
This is true, and it is extremely difficult to balance stock weighting / sector weighting / stock volatility / stock correlation. Even where you have two highly correlated stocks (say banks) one with 10% IV the other with 20% IV the market is telling you that one will rise much faster than the other, so volatility must be considered when selecting the basket.
The general idea is to select a basket of stocks that will broadly track the index, i.e. basket up 2% FTSE up 2%, where that can be done you keep the initial credit regardless.
As an aside, VOD doesn’t correlate much with anything, Pharmas are too volatile, Mining too small a sector, so I’ll probably run with the Oils + 2 banks.
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