Pair Trading Strategy Journal
- Thread starter jonnysharp
- Start date
Question> Wouldn't it be easier to be market neutral by just trading credit spreads or buying stock and having options against it as a hedge to be neutral?...seems this would be easier, no ?
Credit spreads are directional... against credit!
Market neutral means that the beta of your PnL regressed against the market (let's say the S&P 500) is weak, or uncorrelated. So a stock protected with an option is going to be somewhat correlated to the market.
Credit spreads maybe. I don't know enough about the yield curve to respond fully. Selling options against an existing position is a hedge of some kind - even if the motivation is to earn extra income, so I am not sure the comparison is valid.
Stat arb/Pairs trading although market/sector neutral is still speculation.
You:
A: Don't know if convergence/divergence is going to happen
B: Don't know if none/one/both legs of pair are going to provide profits.
Regardless of the market space (energy, currencies, grains, metals, interest rates, equities) or the holding timeframe (months, weeks, days, minutes, high frequency stat arb) the basic tenets for relative value spread trading remains: capture the difference between the products either through selling convergence (narrowing spread) or buying divergence (widening spread).
The trader's edge in spread trading is derived from: 1. the combination of instruments the trader chooses to trade, and 2. the statistical modeling or technical analysis the trader applies to the spread differential.
The trader's edge in spread trading is derived from: 1. the combination of instruments the trader chooses to trade, and 2. the statistical modeling or technical analysis the trader applies to the spread differential.
Selling options against a position is still directional...
For example, everyones favourite: Selling the call against stock you own....you sell an ATM call against your stock....the stock has a delta 1 and your call -.5....you are still running a bullish position with net +.5 deltas...
Longing one stock and shorting the other has neutral delta position as stocks are +1 & -1 respectively...
??
99.99% any trade ever placed is speculation.....I don't think anyone here is arguing otherwise