The index is simply a function of the absolute difference between the performance of AAPL and SPY. On 10/12/12/ the SPY closed down 0.34% while AAPL closed up 0.26%. So calculating the outperformance of AAPL would be adding SPY’s 0.34% to AAPL’s 0.26%, thus coming up with AVSPY’s close of up 0.60%. One could think of this product as long AAPL and short SPY, but not having to worry about weights, the proper amount of compensating shares, or borrowing costs.
Nearly any financial media outlet will have guests on touting this market as very unique, for it’s been a ‘stock pickers’ market…as if there is a market where you don’t have to pick the holdings in your portfolio. These managers try to beat market returns with their unique strategy and insight into companies. They attempt to pick excellent management with positive industry trends for example. The unfortunate part of this is that after all the fees and headache, most funds have returns just like an index fund. NASDAQ OMX alpha options are a convenient way to track and trade this performance, if one was really inclined to invest in management vs the S&P 500. This is just one way to view this product; another could just simply be hedging an individual long with a short index. This could especially be valuable, for the market has been known to trade on news from individual companies with large business scope and market clout… like GOOG & AAPL; both of which have alpha options.
The AVSPY also only has one implied volatility (IV) traders need to worry about, for if speculators wanted to play this otherwise in a pair trade, there would be two different contracts with different IV profiles. Considering AAPL earnings are only about seven trading days away, this product will be an interesting variable to look at when constructing a trade.
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