Pairs Trading with options
- Thread starter xicaju
- Start date
Yes I have been looking into it myself. Think or Swim do them also so check out their website and old seminar transcripts. What products are u looking to pair trade?
I have resurrected an oracle database that I had created back in 2003. It tracked around 60 pairs.
For simplicity, I have weeded it down to about thirty pairs. They range the from brokers to oils to tech.
I look at 3 mo, 6 mo, 1 yr & 3 yr spreads in coordination. If anyone is interested, I will send over these reports. However, the pdf report needs formatting. It would actually be good to get some feedback.
Cheers,
Xicaju
For simplicity, I have weeded it down to about thirty pairs. They range the from brokers to oils to tech.
I look at 3 mo, 6 mo, 1 yr & 3 yr spreads in coordination. If anyone is interested, I will send over these reports. However, the pdf report needs formatting. It would actually be good to get some feedback.
Cheers,
Xicaju
Hi Xicaju,
I would be interested in seeing what you have. You can email me at optiontraderman@yahoo.com.au
cheers
I would be interested in seeing what you have. You can email me at optiontraderman@yahoo.com.au
cheers
Atoning for my earlier cynicism, I am ressurrecting this thread on renewed interest from ET members.
Enjoy!
MoMoney.
Enjoy!
MoMoney.
Hi guys this is my 1st post to this forum. I am happy to have come across this forum when I was doing a search on paired trades and found this thread.
I am a new and inexperienced trader. I just jumped into the stock market after the huge 900 point drop in the dow. While I have been researching and tracking some stocks over the past 6 months (since the oil price boom) I am now only a few weeks into real trading.
That being said this is something that I came across as 2 stocks that seem well balanced to me and profitable plays in this continuing bear market.
One of my 1st stock picks was buying Rowan (RDC) @ 18.1 This is a value stock with good fundamentals and meager dividends. But I think it's true value/share is more likely 35 than the 18 it is currently at. So for a long term play seemed like a good stock to be able to double ones money within a year possibly sooner.
After I bought into this stock I watched it continue to slump into the 15-16 range and I found a ETF that pairs well with its performance that I have bought as a hedge against its decline. That ETF is DUG.
I am not sure how to post charts here but if you look at these 2 stocks side by side you will see good correlation between their values. DUG is a double inverse ETF that shorts against the DOW oil stocks such as Exxon ect.
The beauty of this is if you time your trading right you can buy DUG when it is low as RDC rises to hedge against RDC falling and if/when RDC falls DUG goes up in value so you can sell DUG to mitigate the paper loss of RDC and use that capital to then buy more RDC at a reduced price and then vice versa when RDC rallies sell a portion of your RDC off at a profit and use those profits to buy back some DUG insurance at a greatly reduced price.
This doesen't require the use of options (which are somewhat built in to the ETF) but options could probably be used to maximise your gains even further. I am still learning about options so I have not done this yet.
Just wanted to pass this along and get some feedback on what you guys think about this stock pair?
Another pair that correlates well is DIG and DUG but I don't like DIG as much as RDC because I see it as more vulnerable being a ETF while I like RDC much more as a long term investment worth building up shares in through these paired trades.
I am trying to find an ETF that would hedge Tech companies such as Netgear and Sirius/XM so if anyone knows of one that is a good match for these 2 companies I am interested and still looking to find one.
Again happy to have found this board and I look forward to learning what I can from you all and having some good discussions here.
I am a new and inexperienced trader. I just jumped into the stock market after the huge 900 point drop in the dow. While I have been researching and tracking some stocks over the past 6 months (since the oil price boom) I am now only a few weeks into real trading.
That being said this is something that I came across as 2 stocks that seem well balanced to me and profitable plays in this continuing bear market.
One of my 1st stock picks was buying Rowan (RDC) @ 18.1 This is a value stock with good fundamentals and meager dividends. But I think it's true value/share is more likely 35 than the 18 it is currently at. So for a long term play seemed like a good stock to be able to double ones money within a year possibly sooner.
After I bought into this stock I watched it continue to slump into the 15-16 range and I found a ETF that pairs well with its performance that I have bought as a hedge against its decline. That ETF is DUG.
I am not sure how to post charts here but if you look at these 2 stocks side by side you will see good correlation between their values. DUG is a double inverse ETF that shorts against the DOW oil stocks such as Exxon ect.
The beauty of this is if you time your trading right you can buy DUG when it is low as RDC rises to hedge against RDC falling and if/when RDC falls DUG goes up in value so you can sell DUG to mitigate the paper loss of RDC and use that capital to then buy more RDC at a reduced price and then vice versa when RDC rallies sell a portion of your RDC off at a profit and use those profits to buy back some DUG insurance at a greatly reduced price.
This doesen't require the use of options (which are somewhat built in to the ETF) but options could probably be used to maximise your gains even further. I am still learning about options so I have not done this yet.
Just wanted to pass this along and get some feedback on what you guys think about this stock pair?
Another pair that correlates well is DIG and DUG but I don't like DIG as much as RDC because I see it as more vulnerable being a ETF while I like RDC much more as a long term investment worth building up shares in through these paired trades.
I am trying to find an ETF that would hedge Tech companies such as Netgear and Sirius/XM so if anyone knows of one that is a good match for these 2 companies I am interested and still looking to find one.
Again happy to have found this board and I look forward to learning what I can from you all and having some good discussions here.
forsalenyc asked me to elaborate on what I meant by this
Well what I mean by the timing is that if your just buying the positions as I have then you have to watch the market and where things are going and make decisions on when to sell and at how much.
I use yahoo finance for real time tracking of my positions. I did not sell RDC when it was at its high recently on Tue/Wed but I could have sold it at 22.1 or 22.25 and made $4/share from where I bought it at 18.1 a pretty healthy profit for only holding the stock 3 weeks imo. Such selling would have probably been half of my position keeping the other half at the nice $18 price in case it kept gaining later and also dividends are coming Nov 12-25th.
I then could have taken the profit made from selling off half the shares and bought more DUG at $34-35/share to hedge against RDC falling. IF RDC doesen't fall then the half of my position there gains value again but my DUG goes down.
As it turns out RDC has fallen with the DOW over the past 2 days back to the $18 level. While RDC has been falling DUG has jumped from the $34-35 level to the $40-41 area. This is where the 2 stock values intersect on the chart which is an indicator of when to consider selling the one that is highest.
As it is right now I have a sell option in on DUG at $43 to lock in a profit on it possibly early in the morning as oil prices have fallen in asian markets overnight. Keep in mind that DUG DOES NOT change value based on oil prices but based on the DOW oil index (primarily Exxon but RDC is another one its value is based upon).
So if the DOW is down and RDC falls again slightly in the morning that should lock in my sell on DUG at $43 I could possibly hold out for selling DUG a bit higher if the DOW falls a lot again tomorrow. The beauty of DUG being a double inverse ETF is that it doesen't take a huge drop/gain in the DOW for it to change value, but it doesen't correlate directly to 2X % of how much RDC falls.. it seems more like 1.5X %
But anyways that is what makes these 2 a nice pair in my opinion. I like having many more shares in RDC than DUG but DUG pays off at something like 1.5 to each 1 share of RDC
So assuming my sell goes through at $43 tomorrow on DUG then I free up capital and lock in that profit which I can then use to buy more RDC at a lower price than my initial purchase of it. I then wait for RDC to gain value and once it does I sell a portion of it lock in my profit and by that time DUG is back at a cheap level again to buy as a hedge against my RDC shares falling once more.
I am hoping that I can keep doing trades like this during the bear market which may last the whole year and keep building up shares of RDC while pocketing a little money along the way while I keep building up my RDC shares which in my opinion are great value and I would love to have tons of them long term.
That is the main reason I like RDC instead of DIG because I don't like DIG for a long position. Other companies like RIG or Exxon could be paired with DUG in this way also. But the price value of RDC compared to DUG right now seems much more balanced. RIG and Exxon are much more expensive/share and would take a larger DUG position to offset.
I hope that makes sense?
I am looking for a similar ETF to do the same thing against SIRI, NTGR, AAPL or CISCO
There is probably is a ETF that would pair well with yahoo, google and microsoft also but I don't have current positions in them.
I realize that what I am doing does not involve options trades which is more what the topic of this thread is about, but it is about pairing 2 stocks together. I look forward to other peoples thoughts of this stock pairing if they want to share them.
And also how one might use options to even further maximise the profit potential of this pair. If I understood the flexibility of the timing of options better then that is something I might be willing to consider with this pair. But as it is right now just buying/selling the positions when the time is right seems easier to execute and I can just watch the market and decide when to make a move instead of having to lock that in ahead of time.
But again I don't understand options trading well at all yet. So if anyone wanted to comment on how they would go about doing that based on this example I think that could be very useful.
One more thing that needs mention. I have tracked the 2 stocks against each other over the past 2 years (DUG hasn't been around longer than that) and the pattern seems to hold VERY well. But of course if the market turns bull and RDC keeps going up then you are going to take a loss on the DUG until the market falls again.
That is why I never try to hold very many shares in DUG and the 1.5 multiple works well here in that regard for share ratio and relative stock pricing. So I only buy about 30% of shares in DUG of the shares I have in RDC.
If the market goes into a long term bull then RDC will double its value and the loss on the smaller portion of DUG wont be that significant. I think the ratio of doing this with XOM or RIG paired with DUG would be more risk over the long term if the market goes bull because of the number of shares in DUG it takes to hedge those higher priced shares. You guys can do comparisons there if you want and maybe I am wrong about this. I guess the percentage would be the same either way. I just like RDC better as a growing company to gain value than the more established Exxon and RIG which don't seem to offer the same value as RDC does right now.
RDC just published a 20 page report on their status and most of it looks really good in my opinion for the company over the next 3 years. They already have contracts locked in to 2011 and a lot of cash available to expand on further contracts as they aquire them.
I see the bear market lasting at least a year so this pair should be a good one for awhile. Just hope the bear lasts long enough so I can keep building up shares of RDC for when the market turns to bull.
Code:
"The beauty of this is if you time your trading right
you can buy DUG when it is low as RDC rises to hedge
against RDC falling and if/when RDC falls DUG goes up in
value so you can sell DUG to mitigate the paper loss of
RDC and use that capital to then buy more RDC at a
reduced price and then vice versa when RDC rallies sell
a portion of your RDC off at a profit and use those profits
to buy back some DUG insurance at a greatly reduced price."Well what I mean by the timing is that if your just buying the positions as I have then you have to watch the market and where things are going and make decisions on when to sell and at how much.
I use yahoo finance for real time tracking of my positions. I did not sell RDC when it was at its high recently on Tue/Wed but I could have sold it at 22.1 or 22.25 and made $4/share from where I bought it at 18.1 a pretty healthy profit for only holding the stock 3 weeks imo. Such selling would have probably been half of my position keeping the other half at the nice $18 price in case it kept gaining later and also dividends are coming Nov 12-25th.
I then could have taken the profit made from selling off half the shares and bought more DUG at $34-35/share to hedge against RDC falling. IF RDC doesen't fall then the half of my position there gains value again but my DUG goes down.
As it turns out RDC has fallen with the DOW over the past 2 days back to the $18 level. While RDC has been falling DUG has jumped from the $34-35 level to the $40-41 area. This is where the 2 stock values intersect on the chart which is an indicator of when to consider selling the one that is highest.
As it is right now I have a sell option in on DUG at $43 to lock in a profit on it possibly early in the morning as oil prices have fallen in asian markets overnight. Keep in mind that DUG DOES NOT change value based on oil prices but based on the DOW oil index (primarily Exxon but RDC is another one its value is based upon).
So if the DOW is down and RDC falls again slightly in the morning that should lock in my sell on DUG at $43 I could possibly hold out for selling DUG a bit higher if the DOW falls a lot again tomorrow. The beauty of DUG being a double inverse ETF is that it doesen't take a huge drop/gain in the DOW for it to change value, but it doesen't correlate directly to 2X % of how much RDC falls.. it seems more like 1.5X %
But anyways that is what makes these 2 a nice pair in my opinion. I like having many more shares in RDC than DUG but DUG pays off at something like 1.5 to each 1 share of RDC
So assuming my sell goes through at $43 tomorrow on DUG then I free up capital and lock in that profit which I can then use to buy more RDC at a lower price than my initial purchase of it. I then wait for RDC to gain value and once it does I sell a portion of it lock in my profit and by that time DUG is back at a cheap level again to buy as a hedge against my RDC shares falling once more.
I am hoping that I can keep doing trades like this during the bear market which may last the whole year and keep building up shares of RDC while pocketing a little money along the way while I keep building up my RDC shares which in my opinion are great value and I would love to have tons of them long term.
That is the main reason I like RDC instead of DIG because I don't like DIG for a long position. Other companies like RIG or Exxon could be paired with DUG in this way also. But the price value of RDC compared to DUG right now seems much more balanced. RIG and Exxon are much more expensive/share and would take a larger DUG position to offset.
I hope that makes sense?
I am looking for a similar ETF to do the same thing against SIRI, NTGR, AAPL or CISCO
There is probably is a ETF that would pair well with yahoo, google and microsoft also but I don't have current positions in them.
I realize that what I am doing does not involve options trades which is more what the topic of this thread is about, but it is about pairing 2 stocks together. I look forward to other peoples thoughts of this stock pairing if they want to share them.
And also how one might use options to even further maximise the profit potential of this pair. If I understood the flexibility of the timing of options better then that is something I might be willing to consider with this pair. But as it is right now just buying/selling the positions when the time is right seems easier to execute and I can just watch the market and decide when to make a move instead of having to lock that in ahead of time.
But again I don't understand options trading well at all yet. So if anyone wanted to comment on how they would go about doing that based on this example I think that could be very useful.
One more thing that needs mention. I have tracked the 2 stocks against each other over the past 2 years (DUG hasn't been around longer than that) and the pattern seems to hold VERY well. But of course if the market turns bull and RDC keeps going up then you are going to take a loss on the DUG until the market falls again.
That is why I never try to hold very many shares in DUG and the 1.5 multiple works well here in that regard for share ratio and relative stock pricing. So I only buy about 30% of shares in DUG of the shares I have in RDC.
If the market goes into a long term bull then RDC will double its value and the loss on the smaller portion of DUG wont be that significant. I think the ratio of doing this with XOM or RIG paired with DUG would be more risk over the long term if the market goes bull because of the number of shares in DUG it takes to hedge those higher priced shares. You guys can do comparisons there if you want and maybe I am wrong about this. I guess the percentage would be the same either way. I just like RDC better as a growing company to gain value than the more established Exxon and RIG which don't seem to offer the same value as RDC does right now.
RDC just published a 20 page report on their status and most of it looks really good in my opinion for the company over the next 3 years. They already have contracts locked in to 2011 and a lot of cash available to expand on further contracts as they aquire them.
I see the bear market lasting at least a year so this pair should be a good one for awhile. Just hope the bear lasts long enough so I can keep building up shares of RDC for when the market turns to bull.
I heavily utilize a pairs trading strategy and have done extremely well with it this year. I picked the idea up from someone on another trading bb and enhanced it with my parameters.
There are many ways to approach it but AFAIK, not only do you need to recognize correlation but you also have to be able to identify when over/under value situations arise. That's the edge. At times, you also have to have a bit of confidence in regression to the mean (or something top that effect) since you can take your position and the components can become even more under/over valued, thereby increasing the spread b/t them and running up a paper loss. However, if your edge identification is correct, more often than not, it reverts and you go positiive.
There are a lot of web sites/articles that explain some of the approaches. Though I don't use this approach, here are two that I found interesting when I was starting to explore the concept:
http://www.traderslog.com/trading-pairs.htm
http://luminouslogic.com/a-pairs-trading-example.htm
I use IB and with their DDE connection to Excel in real time. Excel does all of the heavy lifting and makes finding them a lot easier. All you have to do is figure out what you're looking for
There are many ways to approach it but AFAIK, not only do you need to recognize correlation but you also have to be able to identify when over/under value situations arise. That's the edge. At times, you also have to have a bit of confidence in regression to the mean (or something top that effect) since you can take your position and the components can become even more under/over valued, thereby increasing the spread b/t them and running up a paper loss. However, if your edge identification is correct, more often than not, it reverts and you go positiive.
There are a lot of web sites/articles that explain some of the approaches. Though I don't use this approach, here are two that I found interesting when I was starting to explore the concept:
http://www.traderslog.com/trading-pairs.htm
http://luminouslogic.com/a-pairs-trading-example.htm
I use IB and with their DDE connection to Excel in real time. Excel does all of the heavy lifting and makes finding them a lot easier. All you have to do is figure out what you're looking for