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Good stuff. I do like your basket trade example, though my preference would be to select equities that show relative weakness to the broad-based index, going long the index and short the shares. This positions any single-stock event risk working in my favor.

Bone, while equities offer spread opportunities as your example demonstrates, would you agree that the best spreads exploit the term structure of the forward price curve of futures (calendar spreads), including intra-month spreads in treasuries (not calendars, but still a term structure trade in...

Martin, your ten-year chart inspires a question: What is your average hold time for an ED fly?

Bone, thanks as always for your posts on spread trading. Also grateful to ET sponsors like yourself who pay the bills around here. Across the hundreds (thousands?) of ET members, I'm hoping we hear from other spread traders, as well. My apologies to the OP for butting in on his thread, but...

Thinking out loud ... This accomplishes the first step of qualifying the pair. You have two logically related markets (commodity/supplier market) whose price series are highly correlated. Based on your charts, you selected an intraday timeframe (a decision you did not comment on, but is...

Greatly appreciate the insights from the pros contributing to this thread. Also respect the proprietary nature of detailed solutions. Of course, dialogue on this topic can continue with regard to general concepts, with the last mile of a solution to be realized between the ears of the aspiring...

If spreads have a propensity to trend, this prompts the question: Are some trend identification techniques better suited to spreads vs. outrights? There are many conventional approaches to identify trends for outrights. For example, breakouts, momentum, multiple time frames, etc. Are...

If HFT's are simply trading arb situations, then they are just along for the ride of an inevitable arb convergence that would occur with or without them. In this case, they are not causing the price movement, but may be accelerating the move by virtue of their order flow.

Can you provide a competitive analysis which indicates the capabilities and features of your software product that differentiates it from other solutions?

The knock I've heard in the past about Java relates to its memory management (aka, garbage collection). The JVM will release memory based on an internal algorithm which cannot be overriden or user-defined. Consequently, when this memory cleanup becomes active, brief pauses can occur while an...

+1 Your weighting of the stocks in the pair should match how you chart it when conducting your analysis. Typically, weighting schemes are by shares, dollars, or volatility. Your attached charts appear to be ratio charts which align with equal dollar-weighting, just as optioncoach advises.

If you're holding these commodity ETF's longer than intraday, make sure you understand the consequences of contango and roll yield.

I can empathize with any new options trader trying to figure this out. Here are some points to help: - Keep in mind that the option premium anticipates the future price movement of the tradeable (stock or ETF). That means the call option premium will be about as much as the price of the...

There are really two time factors for a cointegration test. The first time frame is simply the length of historical data used for the test. For example, last n days or years. The second time factor is the lag value used to conduct the test. In theory, this lag value (aka, half-life) should...

When you use the term "volatility", are you referring to the option premium (implied volatility), or are you referring to movement of the underlying stock (realized volatility). Your initial post seems to refer to both of these, but they are different. Also, have you clarified with your...

To summarize the author's view, straddles are bad news. When you buy em, stock movement usually does not overcome the double theta bleed. And when you sell em, the premium you collect will eventually be swamped by gamma risk. Yet, long straddles are so seductive ... no directional bias...

Suggest you read page 187 of Natenberg's book, <i>Option Volatility and Pricing</i>.

It's unfortunate that the training/education side of trading has so many bad players. Understandably, it triggers a reflex that makes you suspicious of everyone. But to be fair, you must resist/manage that reflex and not sling mud unless you have facts to back up your attacks. I'm not a...

Murray, thanks for your comprehensive reply. For others following this thread, Murray describes "predictive correlation" in chapter 8 of his book, Cybernetic Trading Strategies, or you can find more info on this technique with a Google search.

Murray, don't these rules imply a leader/follower relationship with lag, where the intermarket is the leader and the traded market is the follower? Correlated markets are easy to find, but it's extremely difficult to establish a consistent leader/follower relationship. In fact, if you could...