freeport-mcmoran

" Where's the edge in that? You'd at least want an OB/OS correlation toward the outside of their normal comparative relative strength range and you need to know which is OB and OS. You can't just plop on a pair at any time and expect it to work." ( by spindr0).

Here is the edge, since we trade with 100 lots you would be slightly long FCX i.e. ( FCX/PCU) 100X200 so if FCX moves up you make a nice gain and if it moves down you are protected because of the ratio. FCX is percieved to be the premier company in the copper mining field. I agree that you can't just plop a pair, you wait till the spread is in your favor. Raw materials have larger movements than other stocks so, its only a matter of time.
 
Quote from dealmaker:

Here is the edge, since we trade with 100 lots you would be slightly long FCX i.e. ( FCX/PCU) 100X200 so if FCX moves up you make a nice gain and if it moves down you are protected because of the ratio. FCX is "perceived" to be the premier company in the copper mining field. I agree that you can't just plop a pair, you wait till the spread is in your favor. Raw materials have larger movements than other stocks so, its only a matter of time.
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Which company is perceived to be the premier company is irrelevant in pairs trading. The spread is the important factor and which side you're on depends on which leg has been the outperformer. At an appropriate point, it could be long PCU and short FCX.

Raw materials having larger movements than other stocks is also irrelevant. It's a pair so a larger than life sector move is negated.

This pair has been flatlining for a month or so. There's no edge now.
 
"Quote from spindr0

Which company is perceived to be the premier company is irrelevant in pairs trading. The spread is the important factor and which side you're on depends on which leg has been the outperformer. At an appropriate point, it could be long PCU and short FCX.

Raw materials having larger movements than other stocks is also irrelevant. It's a pair so a larger than life sector move is negated.

This pair has been flatlining for a month or so. There's no edge now."




Looking at Yahoo Historical Prices FCX moved $17.57 between 05/01/09 to 06/11/09 and PCU only moved $5.16 during the same time period i.e. given 2 to 1 ratio total movement of PCU would have been $10.32 which would have given you $7.25/per share profit assuming you were long FCX whcih this thread is about. Regarding which side of the pair one picks depends on ones time horizon, short term view picks momentum, long term view will looks at the book value, earnings per share etc. because quality stocks most of the time will outperform their peers.
 
ok thanks for your input traders. great thread, great input!

i've made a directional, bearish bet against this financial instrument, with august at-the-money puts (spreads), with actual money, not a paper trade.

it's an irrational move not based on anything in particular. i'm basically keeping my fingers crossed

i'm now trying to analyze my psychological motives for having done the trade. the only explanation for this irrational trade is too much coffee in the morning . ..

it's a 50/50 bet, because looking at some technicals it feels like there's indecision in the investing community about this stock . . .

i don't have an exit strategy, and i don't have a profit target. i know it's stupid, but at least it's honest.

i know the probability of making some money is relatively high. and i still have some time to be wrong.

in any event, good luck everyone, and control those emotions!

too many of you are just too emotional about all this
 
Quote from dealmaker:

Looking at Yahoo Historical Prices FCX moved $17.57 between 05/01/09 to 06/11/09 and PCU only moved $5.16 during the same time period i.e. given 2 to 1 ratio total movement of PCU would have been $10.32 which would have given you $7.25/per share profit assuming you were long FCX whcih this thread is about. Regarding which side of the pair one picks depends on ones time horizon, short term view picks momentum, long term view will looks at the book value, earnings per share etc. because quality stocks most of the time will outperform their peers.
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What you're doing is no more than curve fitting. You could have just as easily done a 1.5 to 1 ratio or no ratio at all and you would have made even more money. Picking 2:1 out of thin air is just that.

If you took your 5/01/09 quotes and did an equal dollar ratio, what would you be ahead on your cherry picked highest daily profit date of 6/11/09? A buck or two? And what if you somehow missed your exit on that very best gain day and stayed in a few more days? You wouldn't even have that buck or two profit. All of this assuming that you were long FCX based on "ones time horizon, short term view picks momentum, long term view will looks at the book value, earnings per share etc. because quality stocks most of the time will outperform their peers." Now that's a mouthful to swallow :) If you can do all of that then why do you need to do a pairs strategy?

With pairs, if the spread gets far enough away from the norm, it's viable. If it happens that the "quality stock is the excessive outperformer, that would be the time to short it, not go long.

It won't be me but the next debate should be why FCX is the premier company and PCU isn't. Once that's settled, you can conclude that you can only go long premier stocks in pairs.
 
Quote from spindr0

"This pair has been flatlining for a month or so. There's no edge now."


It was alleged the pair i.e. FCX/PCU was flatlining for a month or so and there was no edge, in my previous post I showed, it was not flatlining and there was an edge. As for why one needs a pairs strategy? No one bats 100%.
 
Quote from dealmaker:

It was alleged the pair i.e. FCX/PCU was flatlining for a month or so and there was no edge, in my previous post I showed, it was not flatlining and there was an edge. As for why one needs a pairs strategy? No one bats 100%.
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Yep, you got it. It's not flatlining with yourt hindsight curve fitting.
 
Quote by spindr0

" Yep, you got it. It's not flatlining with yourt hindsight curve fitting."



No trader knows what's going to happen at a future date, that's why we hedge. Yes, hindsight showed your posts were without merit.
 
Quote from dealmaker:

No trader knows what's going to happen at a future date, that's why we hedge. Yes, hindsight showed your posts were without merit.
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Yep, you proved that beyond the shadow of a doubt with your cherry picked hindsight curvefitting. LOL.

Given that you picked the period of 5/01/09 and 6/11/09 to demonstrate your point, try using a $ neutral position as suggested in your first post in this chain instead of a face saving 2:1 ratio. This time, try to do the math right... I think it's called subtraction.


Quote from dealmaker:

Instead of going long on FCX and exposing yourself to a large risk, why not make a pairs trade out of it? I would pair FCX with PCU, you will have to be $ neutral; both companies are in the same field thus your exposure is limited and you still can take advantage of any upside.
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So on a dollar neutral FCX/PCU pair position with FCX as the long, on how many days during this period did the pair have a net profit?

And if you figure out how to do the math right, check out how this pair performed last Sep or Oct or Nov or Dec. Let us know what the upside was for a $ neutral FCX/PCU pair during any of these months.
 
"Yep, you proved that beyond the shadow of a doubt with your cherry picked hindsight curvefitting. LOL." ( by spindr0)

"So on a dollar neutral FCX/PCU pair position with FCX as the long, on how many days during this period did the pair have a net profit?" ( by spindr0).



spindr0, you brought up last month or so time frame in your original post. The numbers I have posted are from the same time frame.
During this period there were no fundamental or technical reasons to disengage this pair. Disengaging a performing pair is a bad trade. Stocks never move straight up or down, they gyrate. Any trader with a days worth of experience knows this.
 
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