Pairs Trading Strategy Model

Quote from Neutral_Al:

I trade equities and some options pairs spreads. Some of the recently closed positions are ALTR/XLNX from R=0.539 to 0.60(gain of 11%) and MSFT/IBM from R=0.269 to 0.3 (gain of 10%). I presently hold 18 pairs. Ex: CTX/DHI, CECO/APOL.

Al
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could you explain your option spreads strategies ?

Here in Brazil, I´m implementing pairs based on ratios of implied volatility with different strikes (implied volatility surface spread). The idea is to go Vega neutral in the pairs when they cross 2SD.

Are we talking about the same subject ?
 
Hi Everyone,

Have read this entire thread, and wondering why there has been no input in almost a year.

A few questions to any pair traders.

1. Is there an auto spreader that can be used with equity pairs-- similar to TT's xtrader that can help with execution/slippage issues?

2. Is pairstrader.com a useful tool that is still being used by anyone. e.g. Are there other sites that are out there.. searches haven't turned up much.

3. Any suggestions for essential reading for learning more about pairs.

Thanks for any input that anybody out there might have.
 
I have got through half this thread so I am not sure if this question has already been answered, but can trading pairs be executed on a intraday basis and be profitable? I'm trying to develop a pair trading model for day trading, becuase there has to be more to day trading then just buying low and selling high, but thats just me.
 
Quote from nysekiller:

I have got through half this thread so I am not sure if this question has already been answered, but can trading pairs be executed on a intraday basis and be profitable? I'm trying to develop a pair trading model for day trading, becuase there has to be more to day trading then just buying low and selling high, but thats just me.
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Speaking about pairs trading in general, it relies on the assumption that there is a convergence (or divergence) between two securities that will occur sometime in the future due to some measured data (stat arb, for example). As such, if you're talking about two non-similar securities, then it's tough to profit from an intraday pairs trade. Now, if you're talking about the old RD Shell, for example, where you're doing a pairs trade on an identical security then intraday is a great time to make a profit as supply and demand will cause the pair to trade at a premium or a discount. So, in short, you can do it intraday, but I doubt it will be as profitable as a longer-term view (if they are not identical securities). Just my 2 cents....
 
Hi all,

I've read all of this thread and have noted a few issues.

Everyone mentions correlations and ratios, but has anyone tested these for their statistical significance?

I'm coming from the statistical arbitrage perspective, and based on the regressions I've done, it is more important that the pair are cointergrated. Then it is just a question of plotting the standard errors and identifying by eye what level to put the trades on. Hence no use of technical analysis or fundamental analysis.

I think this is why some have blown up doing pairs trading, because they are thinking that if the pair are correlated and have been trading in a certain ratio, then it is a good pair to trade. What you have to bear in mind is when something is correlated, all it means is if it goes up, so does X and if it goes down, so does X. There is no reason they should converge or diverge. Or put another way, just because they are correlated, doesn't mean they are cointegrated.

Competition has taken away alot of the profits available in pairs trading. Given the 10,000 pairs I've looked at and their profitability of at best 8% per annum in the last year, you might as well invest in an index tracker, and save the effort.

If you want to know how it is done properly, read Pairs Trading Quantitative Methods and Analysis by Ganapathy Vidyamurthy.
 
Quote from reactor:

Hi all,

I've read all of this thread and have noted a few issues.

Everyone mentions correlations and ratios, but has anyone tested these for their statistical significance?

I'm coming from the statistical arbitrage perspective, and based on the regressions I've done, it is more important that the pair are cointergrated. Then it is just a question of plotting the standard errors and identifying by eye what level to put the trades on. Hence no use of technical analysis or fundamental analysis.

I think this is why some have blown up doing pairs trading, because they are thinking that if the pair are correlated and have been trading in a certain ratio, then it is a good pair to trade. What you have to bear in mind is when something is correlated, all it means is if it goes up, so does X and if it goes down, so does X. There is no reason they should converge or diverge. Or put another way, just because they are correlated, doesn't mean they are cointegrated.

Competition has taken away alot of the profits available in pairs trading. Given the 10,000 pairs I've looked at and their profitability of at best 8% per annum in the last year, you might as well invest in an index tracker, and save the effort.

If you want to know how it is done properly, read Pairs Trading Quantitative Methods and Analysis by Ganapathy Vidyamurthy.
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With all due respect...
You miss the forest by focusing on a tree...
That hoary old correlated versus cointegrated mind f*ck...
And your conclusion is simply not correct.

There are 1000s of quality Listed pair combinations...
And a pair must satisfy a mathematical corelation such as > 0.90 over medium term 3-6 months...
And make sense...
Meaning one would rationally expect these 2 securities to be highly corelated.

Also in the real world...
Quants traded basket of corelated securities...
So the focus is never on a single pair.

It's best to corelate a universe of stocks to an "index"...
Such as a 100 gold mining stocks to the price of gold...
To give a very volatile, but probably viable, example.
One might be long 20 gold stocks and short 20 gold stocks...
And trade in and out in high volume... all in the context of the price of gold.

It's really all about volume, volume, and volume...
In post-decimalization 2006.

But there is no easy money lying on The Street...
And this requires lots of very expensive propriatary software...
And execution MUST be in the hands of a very experienced traders...
Because in the above example universe (which I do not trade)...
There would be many pitfalls ** specific to ** the gold mine universe...
That could never be screened out in a quantitative manner...
But require highly experienced decision making.

Why?

Because AI software... specifically "expert systems"...
Are not anywhere close to the point...
Where it could beat a pro poker player...
Or match the complex and real-time decision making of a pro trader.
 
Yes, but not in the traditional way. Not in the way that the article suggests.

nitro
Quote from Bruto Blukowski:

This is the longest thread covering this subject and does contain some good ideas and resources.

Would like to see it maybe active again after the quick Webcast that Rob did last Thursday.

Are you still active in this Nitro & Mschey?


Interesting article:

http://www.wallstreetandtech.com/showArticle.jhtml?articleID=189400613

And here is a link that has some PDF files of samples outlining some of their reports:

http://www.louiscapital.com/statmod.htm
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Yes, it is possible.

nitro
Quote from nysekiller:

I have got through half this thread so I am not sure if this question has already been answered, but can trading pairs be executed on a intraday basis and be profitable? I'm trying to develop a pair trading model for day trading, becuase there has to be more to day trading then just buying low and selling high, but thats just me.
More...
 
Quote from nitro:

Yes, but not in the traditional way. Not in the way that the article suggests.

nitro
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I read the Louis Capital article 3 months ago...

They are in the business of selling financial products based on pairs/basket trading...
Very expensive financial products...
Where 100 hedge funds may be getting the same information...
Unless you pay them extra to get special treatment or data.

This is way, way inferior to developing similar systems in house...
Which is what I have been doing for > 10 years.

I'm posting record profits for my firm this summer and saturated...
Have way, way more good pairs/basket trading opportunities than I can possibly execute...
And might go from 200 trades/day to 400 trades/day in the next year through internal growth...
But could easily scale 10:1 with some infusion.

This is probably the one must read thread at ET.

Unfortunately, most people are ** hopelessly unqualified ** to be in that Top 5% that beats Zero Sum games...
And too many people are determined to beat their head against a wall in a dead end...
While many others sabotage their trading and life... because they fear success.
 
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