Finding spread trading opportunities

Gambit,

Baskets vs. index. Am i correct in my assumption that , as an example, this is selecting AAPL and a few other strong tech stocks as a basket (long leg)vs. QQQ(short )?
If so then i could see a strategy that monitors say 100 tech stocks, 100 financial stocks,
100 healtcare stocks, etc... And hedges with QQQ,XLF,XLV etc.... Respectively, and RANKS them 1-100 , rotating the top 5 or 10 Relative strength equities into the basket.
 
It is similar to what you suggested eurusdzn. This approach is straightforward and it fits in with the idea of a "hedged trending pair." There are so many liquid ETFs these days so a liquid hedge is often available. The ranking is a nice addition. There must be some sector rotation papers on CXO or ssrn which could provide ideas. I will see if I can post some links. Thanks to everybody for their input.
 
US treasuries and stocks are in theory, negatively correlated since stocks receive risk money
At the expense of bonds. Therefore, going long both stocks and bonds is a hedged pair in that a selloff in stocks is hedged with bonds bid.
The nice part about this "pair" over the last 6 years is that in general, not all the time, bonds have not been a drag on this pair yet still act as a flight haven(hedge). A smooth trend for years.
Abobe is just one example, stange as it has been of having your cake and eating it as well.
The spread resorts to negatively correlation durimg crisis and a long+long pair is hedged.
Ths is like AAPL+GOOG where GOOG will rise durimg a market selloff. Not going to happen.
Anyway what do you guys think of not limiting one self to lomg/short correlated and
Including long+long uncorrelated to hedge?
 
eurusdzn said:
... what do you guys think of not limiting one self to long/short correlated and including long+long uncorrelated to hedge?
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Agree fully. The more common scenario is long/short for a hedged spread, but you can be long/long if the markets run inversely to each other. For example, being long SPY and long GLD in a market crash is a hedged position.

For the case of inverse ETF's, you make a distinction between being long or short the trading instruments versus being long or short the underlying markets they represent. You could be long a regular ETF and long an inverse ETF and have a hedged spread.
 
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Just another thought regarding relative trading/investing. Apologies if somewhat off topic from
spread trading.
In the US any spread we buy is probably denominated in USD , unless you actually have an account with multiple currencies, and, the rising USD is a drag on the spreads profitability.
If i made 6% on a spread over many months and USD gained more over this perioed then its difficult for me to feel good about that trade.
So , for example, if i buy the FXE/GLD spread i may buy YCS(inverse yen) which is effectively
long EUR/JPY - GLD. or UUPT/FXI-FEZ as another example to nenefit from risimg USD.
I am going to look into requiring a currency leg in my spread construction.
 
Trader13 said:
Is anyone using arb-maker (link shown in original post above)? If yes, I'm curious to know if you found any good spreads in currencies? Their basic subscription says it's for FX.
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Intraday, yeah, effective. EoD tougher. A bitch to install/setup. NB: Have a financial interest in the software so you should discount any bias you detect...
 
DBS67 said:
Intraday, yeah, effective. EoD tougher. A bitch to install/setup. NB: Have a financial interest in the software so you should discount any bias you detect...
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I'm having install problems too DBS67. I have to get a "clean" computer that hasn't had sql installed on it yet. I'm working with Panos so he should be able to help me out.
 
"Say it aint so". I strayed from IB for a couple of years and recently returned due
to what i remembered was versatile order construction. I specifically remember
One Triggers Another orders. I would like to place a limit order that when filled triggers a market order on the more liquid leg so as not to be stranded single legged. (Trader13 idea)
I can only find the options for "pair trade" and "hedged" . Both assume "sell". I want to
Buy TLT limit and SPY market and these optioms wont do. Am i mistaken tjat IB has dropped
OTO and similar orders? I am using TWS Classic, not Mosaic.
Thanks.
 
eurusdzn said:
"Say it aint so". I strayed from IB for a couple of years and recently returned due to what i remembered was versatile order construction. I specifically remember One Triggers Another orders. I would like to place a limit order that when filled triggers a market order on the more liquid leg so as not to be stranded single legged. (Trader13 idea) I can only find the options for "pair trade" and "hedged" . Both assume "sell". I want to Buy TLT limit and SPY market and these optioms wont do. Am i mistaken that IB has dropped OTO and similar orders? I am using TWS Classic, not Mosaic.
Thanks.
More...
You need to review the IB documentation and watch the webinars to refresh yourself on the various order types and the terminology IB uses for these orders.

To summarize, if you want the limit order to apply to the price of leg1 only, create it as a regular limit order. Then "attach" a second order for leg2 as a market order. This is an OTA relationship.

If you want the limit order to apply to the spread price of leg1 vs leg2, then create the order using the Generic Combo dialog. Set the order type to "LMT + MKT". This will be a non-guaranteed order, which means "best efforts" on the part of IB to get you filled at your price. In a fast moving market your fill price may be better or worse than you expect.

IB TWS has a learning curve. All of the keystrokes and screen flows you need to perform to get your trade setup correctly will seem like a chore until you get used to it.
 
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