Yes I do, no hard rule in place, I use it on case by case basis, in your example I would want to be long the 5b stock and short the 50b stock to mitigate takeover risk.
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Pair Trading Strategy Journal
- Thread starter jonnysharp
- Start date
Yes I do, no hard rule in place, I use it on case by case basis, in your example I would want to be long the 5b stock and short the 50b stock to mitigate takeover risk.
Quote from jonnysharp:
Yes I do, no hard rule in place, I use it on case by case basis, in your example I would want to be long the 5b stock and short the 50b stock to mitigate takeover risk.
I wouldnt worry too much about takeover risk in todays market. The issue is that the smaller cap stock tends to have more volatility than the bigger cap so the pair might correlate more to the smaller caps movements.
Quote from jonnysharp:
Two new trades taken on Friday;
Long XLNX @ 18.06
Short ALTR @ 16.51
Long BIDU @ 191.22
Short GOOG @ 339.29
Hi Jonnysharp,
Is there a way you can calculate the potential profit if the bidu/goog ratio goes from 0.55 to 0.65?
And would you take BIDU/GOOG 100/100 shares?
-SL
Johnny, or other pair traders,
Given that there is a correlation between stock price and volatility, would it not seem more reasonable to pair trade based on being volatility neutral, rather than dollar neutral? Or am I way off base here?
And if so, how would one go about that? I was thinking of something around ATR. Would that be reasonable?
Also, does anyone know if Pairtrade Finder uses any cointegration algorithms, or is it all based on correlation?
Cheers,
Adrian
Given that there is a correlation between stock price and volatility, would it not seem more reasonable to pair trade based on being volatility neutral, rather than dollar neutral? Or am I way off base here?
And if so, how would one go about that? I was thinking of something around ATR. Would that be reasonable?
Also, does anyone know if Pairtrade Finder uses any cointegration algorithms, or is it all based on correlation?
Cheers,
Adrian
Quote from cipherscribe:
Johnny, or other pair traders,
Given that there is a correlation between stock price and volatility, would it not seem more reasonable to pair trade based on being volatility neutral, rather than dollar neutral? Or am I way off base here?
And if so, how would one go about that? I was thinking of something around ATR. Would that be reasonable?
Also, does anyone know if Pairtrade Finder uses any cointegration algorithms, or is it all based on correlation?
Cheers,
Adrian
If you are trading the stock outright.. then you are trading price direction not volatility. Most stocks that are in the same industry that are highly correlated usually have similar volatility. You want to avoid trading a $5 stock vs a $50 stock. A $50 stock vs a $55 would be ideal. That would take care of wild price swings the pair would experience. They all eventually either revert to their mean or the pair blows up.. but when they are similar in stock price usually there is less volatile price swings.
Quote from ScreenLocal:
Hi Jonnysharp,
Is there a way you can calculate the potential profit if the bidu/goog ratio goes from 0.55 to 0.65?
And would you take BIDU/GOOG 100/100 shares?
-SL
Yes you could calulate the potential profit on that trade, in your example if the ratio went from 0.55 to 0.65 that would be an 18.18% increase in the ratio, so take the $$$ committed to one side and multiply by 0.1818 and that would be the profit.
No im $$$ neutral when I trade, not equal amount of shares.
Quote from cipherscribe:
Johnny, or other pair traders,
Given that there is a correlation between stock price and volatility, would it not seem more reasonable to pair trade based on being volatility neutral, rather than dollar neutral? Or am I way off base here?
And if so, how would one go about that? I was thinking of something around ATR. Would that be reasonable?
Also, does anyone know if Pairtrade Finder uses any cointegration algorithms, or is it all based on correlation?
Cheers,
Adrian
I can see what your getting at here, however as mentioned if one stock in a pair is significantly more volatile that the other stock you shouldn't be trading that pair because the two stocks aren't that similar, in a ideal world adjusting position size for each side based on volatility makes sense, however in the reality it doesn't help profitability i think.
So BIDU/GOOG would be something like 175/100 is that correct? Then I understand!Quote from jonnysharp:
Yes you could calulate the potential profit on that trade, in your example if the ratio went from 0.55 to 0.65 that would be an 18.18% increase in the ratio, so take the $$$ committed to one side and multiply by 0.1818 and that would be the profit.
No im $$$ neutral when I trade, not equal amount of shares.
-SL