Pair Trading Question

[FreakofNature]

Is pair trading a fairly effective way to be in the market without much worries of major upside or major corrections?

For instance

Long AAPL

Short DELL

If the market collapses, DELL will probably drop more and AAPL less.

Trying to learn this, so any suggested reading on benefits risks, basically want to learn the ropes.

Another idea, it's quite obvious AMZN is stealing business from retailers like BBY, so why not, long AMZN short BBY.

Thanks for guidance.

 

[marcoPolo21]

do DELL & AAPL have some Historical Correlation?

not to mention a Huge Price difference...yikes

marc

 

[Arnie]

Good source of info on pair trading

http://www.pairtrader.com/

 

[FreakofNature]

Quote from marcoPolo21:

do DELL & AAPL have some Historical Correlation?

not to mention a Huge Price difference...yikes

marc

Talking mostly from a fundamental point of view, in that regard, they do.

Now the price difference, I dont understand what you mean, shouldn't the number of shares balance that differential ?

 

[FreakofNature]

Quote from Arnie:

Good source of info on pair trading

http://www.pairtrader.com/

Excellent, just what I needed, thank you.

 

[Rationalize]

Quote from marcoPolo21:

do DELL & AAPL have some Historical Correlation?

not to mention a Huge Price difference...yikes

marc

You don't have to trade 'em 1 for 1

 

[marcoPolo21]

I forget, but I think the professional pair traders
want to keep the prices within 5-10% or so of each other.

You could ask Don Bright; he's always helpful.
That's one of their strategies.

If you have a big move in Dell [in the wrong direction],
you could be in trouble.
You would have about 38.5 x as many shares of Dell !

marc

 

[Rationalize]

Quote from Rationalize:

You don't have to trade 'em 1 for 1

 

[marcoPolo21]

Quote from Rationalize:

You don't have to trade 'em 1 for 1

true

Is that pair trading, or a hybrid of some sort?

marc

 

[Rationalize]

Quote from marcoPolo21:

true

Is that pair trading, or a hybrid of some sort?

marc

It's the only pairs trading I know

edit: To be explicit, there are a lot of ways to do this. Cash neutral is one, volatility neutral is another. Depends on what you think you can forecast - correlation, relative volatility etc.