Butterfly implied returns
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Di Wu
- HKCity University of Hong Kong
Strategy in a nutshell
The strategy trades S&P 500 stocks using butterfly option spreads to calculate the Butterfly Implied Return, which measures correlation between butterfly price changes and VIX. Stocks are ranked monthly, with long positions in the top three deciles and short positions in the bottom three deciles, using value-weighted portfolios and monthly rebalancing.
Economic rationale
The Butterfly Implied Return factor reflects a stock’s crash probability by capturing the relationship between price movements and market fear (VIX). This allows the strategy to identify and short stocks likely to crash, generating abnormal returns beyond traditional factor models.
Backtest performance
Annualised return2.67%
Volatility7.27%
Sharpe ratio0.37