tasty Extras - March 18, 2021 - Measuring Risk of Pairs Using Correlation

published 3 weeks ago by tastytrade, Inc.

When trading pairs, be mindful of their correlation, as that will determine the daily risk profile of the trade. A high positive correlation between the pair will translate to a lower volatility in the position, whereas a low or negative correlation between the pair will translate to higher daily volatility. As an example, the daily volatility in the /ES-/ZB pair was around 6x larger than the daily volatility in the /ES-/YM pair when taking into account the historical daily moves across the two bases relative to both pairs’ notional values.

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