Long small / Short Big

B

BlueHorseshoe

I've been buying some volatile small cap names ahead of seasonal strength in Dec/Jan & doing very well. Now with Australia raising rates and high EPS hurdles for 4Q, I'm thinking a Long small cap / Short large cap might be the best configuration as we head into January.

I've never done this before and looking for considered thoughts / suggestions on best instruments/markets for a long small / short large portfolio.

At first blush, I could continue adding select small cap names and also short large caps like MSFT, GE, GM in direct proportion. This could add the benefits of stock selection.

But if I go short YM and long a small cap index futures contract, will SPAN margining at IB provide for more efficient use of capital, i.e. less margin requirement for the total position? Can anyone recommend a preferred small cap futures contract? I would think the criteria should be that the contract is small-cap focused, reasonably liquid, and with reasonable spreads.

Also if you have experience with this strategy during previous Dec/Jan periods & wish to share your experience I would be happy to hear.

Blue
 
I'm not sure the YM will get you SPAN (and I doubt most daytraders know about SPAN, as you mentioned) but it's definitely worth pursuing.

I would suggest an arb type play with where you're going. Take the two ETFs, indexes, whatever and find some divergence that will likely disappear. One idea I'll throw out as an example I've been looking at the past few days is semi's vs. QQQ. The SMH has run up stronger than the NASDAQ lately, causing the divergence to be pretty strong. The current price of QQQ is about 81% of SMH. At times, they have crossed 100% and been as high as 120%+. The low is around 73% in mid 02 and it did eventually return to over 100% before making the current drop. With that, I would short SMH and go long QQQ looking to close the gap. I don't think you would get SPAN for this, nor would you get SPAN treatment for YM...but I could be wrong.

It's only worth about 20% return covered at 100%, but it should be a pretty low risk play.
 
You must log in or register to reply here.
Back
Top