Pair Trading Strategy Journal

Quote from dealmaker:

NUE / X = 300/400, NUE has dividend 06/26.
CPB / KFT = 100/100 KFT has dividend 06/26.
CAT / DE = 100/100 DE has dividend 06/26.

Of-course dividend stocks long.
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I'm not a stock trader so forgive me if this is a silly question.

How important is it to not take trades where you'll be short the dividend payer?

Can it blow out your trade if you do?

And how do you know when a stock will pay divdidends?

Thanks.
 
Passed KNX:ODFL, earnings ODFL next week
Passed PCL:RYN, dont like the downgrade on PCL
Passed NDN:BEBE

Seth: "What do you mean, you're gonna pass. Alan, the only people making money passing are N.F.L. Quarterbacks and I don't see a number on your back."
 
JonnySharp

In the fall of 2008 you reported that you were not pairs trading as a way of making your living, but rather for growth of capital.

If you dont mind my asking, is that still the case or are you trading full time?
If not, how much time would you estimate you invest each day on average for your current rate of performance?

You still have a great thread here, btw.

Many thanks
 
Quote from jonnysharp:

Just exited my best trade to date for massive profits

Sold ZEUS @ 25.52 (bought this one at 16.51 for a 54.57% gain!)
Covered SIM @ 6.92

Very happy today, whats that quote off the yahoo website ''I love the smell of profits in the morning'' :D
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Congrats on this trade and in general. Per my notes after almost a year you should be up big!

I do have one question. At one point I had 17 straight winners. I noticed the average win on my winners was smaller then your average despite the average loss size being similar, so i decided possibly i was being too conservative on the patterns i was looking for and decided to try to be a little more aggressive. Since then, my win rate is still pretty high but I have had a number of large losing trades. Most of these were entered into between 4/30 and 5/6.

Meanwhile, despite the big win above, it looks like you had pretty big losers in dac/sb,inn/bucy, met/pru. Interestingly they were all entered into in the same timeframe that I had my worst trades and they were completely different trades.

It got me thinking....was there something potentially unusual in the market during that week or two that we could learn from that created unusual trade entry conditions? It seems more than coincidental that we both made completely different trades in the same time periods that were among our worst trades in several months.

Any thoughts?
 
Quote from Don87109:

I don't have a good quantitative guideline for you, but one way to achieve black swan protection is to use options. If you have some options savvy look at buying in-the-money calls and puts to simulate long and short stock positions. This is not economical for every stock, but for hi-volume stocks that have tight B/A option spreads it has merit.

There are a couple of advantages to using options. The primary one is that your losses are limited especially in a black swan event.
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Hey Don,

I was thinking the same thing about using options so that Black Swan events would be a non event... tho I was initially thinking more along the lines of buying OTM protection for the equity position rather than ITM legs. On second thought, ITM with a good amount of time until expiration might have more merit due to the residual premium if the either underlying doesn't cooperate.

I was also thinking that buying the opposing option at the same strike (OTM) would also be a possible buy as protection since it would be relatively cheap, particularly if it was of shorter duration.

For example, ABC is at 40 and XYZ at 60. Instead of buying ABC at 40 and shorting XYZ at 60, perhaps buy the ABC 35c and the XYZ 65p for the pair. The protection would be buying the ABC 35p and the XYZ 65c. As long as the pair components move significantly, the premium decay wouldn't be much of an issue. W/O that movement, buying double straddles would be a problem. I guess this is another investigation to put on my "to do" list :)

I haven't read much of the 200+ pages posted so apologies if this is an obvious question. For the regulars, are you trading equal lots on both sides of your pairs (1 to 1) or are you ratioing them in some fashion? Thx
 
Quote from spindr0:

Hey Don,

I was thinking the same thing about using options so that Black Swan events would be a non event... tho I was initially thinking more along the lines of buying OTM protection for the equity position rather than ITM legs. On second thought, ITM with a good amount of time until expiration might have more merit due to the residual premium if the either underlying doesn't cooperate.

I was also thinking that buying the opposing option at the same strike (OTM) would also be a possible buy as protection since it would be relatively cheap, particularly if it was of shorter duration.

For example, ABC is at 40 and XYZ at 60. Instead of buying ABC at 40 and shorting XYZ at 60, perhaps buy the ABC 35c and the XYZ 65p for the pair. The protection would be buying the ABC 35p and the XYZ 65c. As long as the pair components move significantly, the premium decay wouldn't be much of an issue. W/O that movement, buying double straddles would be a problem. I guess this is another investigation to put on my "to do" list :)

I haven't read much of the 200+ pages posted so apologies if this is an obvious question. For the regulars, are you trading equal lots on both sides of your pairs (1 to 1) or are you ratioing them in some fashion? Thx
More...
Spin,
I'll have to give a little more thought to your double straddle idea, but if that could be done with minimum time value it sounds worthwhile.

I've done a couple of plays with ITM contracts and I am pretty happy with the results. One pair went against me pretty hard and my losses were significantly less than if I used stock alone. One of my current pairs has a simulated short on Palm using ITM puts and sleeping at night is a lot easier than if I had short stock. Rumors are flying that Palm is an attractive takeover target.

As far as your "equal lots" question I think most of the traders here use equal dollars on each side which, of course, means different lot sizes.

BTW, as a very savvy options guy you will understand how the ITM delta curve works to your advantage. For the benefit of others that curve basically means that if the pairs move together the options can be profitable where the equivalent stock method has no profit. Of course options have many disadvantages, so unless you are savvy I suggest you stay away.

Don
 
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