Highly appreciated!
Charles
Charles
Pair trading ES/NQ
- Thread starter Trend Fader
- Start date
Very interesting thread indeed !
How is the reduced risk reflected in the margins one has to put up ? Do I have to pay the full margins for each contract ?
Happy trading
Marsupilami
How is the reduced risk reflected in the margins one has to put up ? Do I have to pay the full margins for each contract ?
Happy trading
Marsupilami
I am absolutely new to the idea of pairs trading in any sense. If the objective is spread tightening, would it make sense to just pair something like the YM and the actual underlying stocks since their spreads absolutely converge at the YM contract's maturity??? This is in fact a curiosity question.
Basically what it would boil down to is buying the correct proportion of DJ 30 such that the value change is equivalent to the YM change... Evidently, I really need to think about this some more to catch up so to speak, but since it is certain that the spread converges at contract maturity, it should be possible to do the same type of spread locking between the futures and underlying stock index... Would type of return would this yeild. Y/N??? Hmmm....
Fascinating thread.
Kind Regards,
MAK!
Basically what it would boil down to is buying the correct proportion of DJ 30 such that the value change is equivalent to the YM change... Evidently, I really need to think about this some more to catch up so to speak, but since it is certain that the spread converges at contract maturity, it should be possible to do the same type of spread locking between the futures and underlying stock index... Would type of return would this yeild. Y/N??? Hmmm....
Fascinating thread.
Kind Regards,
MAK!
You are an arb in the making!
I don't know if that's good or bad... LOL! Since maturity only occurs 4 times a year. Presumably there's some compexity with regards to names dropping in & out, divisor adjustments etc... Just kind of ran the thought course on the two since it is a certainy that Futures and the Index converge at contract maturity. Thus at rollover do the deed and hold until maturity. Curious as to whether the combo provides a return that is attractive enough to be worthwhile to minor trader. Clearly, I need to run some numbers and just figure out the math. It's likely that this has already been done many times over... Still interesting tho... Hmm... The flip is spread widening (vice versa I guess)...
MAK!
MAK,
I really don't know, but don't believe the posts that are going to come after this. Find out for yourself
There are so many ways to take money out of the market, its just to pick the way you want to trade and spend your time.
I have a pattern matching system that I quietly play with (its an old DOS program...remember DOS?)...You would not believe the response I got here in ET...So it remains quiet
Michael B.
I really don't know, but don't believe the posts that are going to come after this. Find out for yourself
There are so many ways to take money out of the market, its just to pick the way you want to trade and spend your time.
I have a pattern matching system that I quietly play with (its an old DOS program...remember DOS?)...You would not believe the response I got here in ET...So it remains quiet
Michael B.
You are an ARB in the making.
Investopedia discusses the very thing that you ask:
http://www.investopedia.com/articles/trading/04/090804.asp
"A pairs trade in the futures market might involve an arbitrage between the futures contract and the cash position of a given index. When the futures contract gets ahead of the cash position, a trader might try to profit by shorting the future and going long in the index tracking stock, expecting them to come together at some point. Often the moves between an index or commodity and its futures contract are so tight that profits are left only for the fastest of traders - often using computers to automatically execute enormous positions at the blink of an eye."
I suggest that you do your own research to determine the potential for this type of pairs trade. You can pairs trade anything that has a history of strong correlation, which occasionally and temporarily diverges from their correlation.
Charles
Charles,
far be it for me to be the party pooper, but I believe a little more care is necessary here.
In particular I am intrigued by your calculation of "fair value".
This will be more problematic for say the ER2/NQ pair.
Plot data for a couple of years - for ER2/NQ pair, and take a look at the ratio.
Not a stationary process is it? Forget about the variance, even the mean is nowhere near constant.
Using your method all might appear to be going well, until your "fair value" is now far from fair. If you are going to investigate this approach, you might wish to detrend the ratio. I am not saying this will work and make you cubic cash either.
Just something to ponder upon before plonking real cash.
You might also find co-integration useful (be careful with correlation). Though you will pretty much always find that SIF time series (in the same market - i.e. US) are highly co-integrated and correlated.
far be it for me to be the party pooper, but I believe a little more care is necessary here.
In particular I am intrigued by your calculation of "fair value".
This will be more problematic for say the ER2/NQ pair.
Plot data for a couple of years - for ER2/NQ pair, and take a look at the ratio.
Not a stationary process is it? Forget about the variance, even the mean is nowhere near constant.
Using your method all might appear to be going well, until your "fair value" is now far from fair. If you are going to investigate this approach, you might wish to detrend the ratio. I am not saying this will work and make you cubic cash either.
Just something to ponder upon before plonking real cash.
You might also find co-integration useful (be careful with correlation). Though you will pretty much always find that SIF time series (in the same market - i.e. US) are highly co-integrated and correlated.
Quote from ElectricSavant:
MAK,
I really don't know, but don't believe the posts that are going to come after this. Find out for yourself
There are so many ways to take money out of the market, its just to pick the way you want to trade and spend your time.
I have a pattern matching system that I quietly play with (its an old DOS program...remember DOS?)...You would not believe the response I got here in ET...So it remains quiet
Michael B.
Savant... I have followed your posts closely in many places. They are high quality stuff. DOS??? So COOL! How about a PDP-8! They still use these bloody PDP-8 and it's OS in Penn Station here in NYC! Largely I post to really press in some hardcore thinking. As is evident by what you see, the sea of market opportunities is so vast. I too have about half a dozen automated trading programs and a dozen more I need to code up. It gets really boring and I largely use the returns to keep extending improvements since the improvements are more exciting. I'm with you man! Plus, my "mrs" is somewhat high maintenance. I chauffeur her in my gas guzzling XUV... RITA, KATRINA... ARGH!
In essence, I am aware of and agree with the all of your points. Just throught I'd drop my $.02 in. Keep on BRO!
Kindest Regards,
MAK!