Pairs Trading?

Quote from Maverick74:

Don, in my world, this is called refusing to take a loss. Not a good trait for a trader to have.
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Hi Mav...in some world's I would have to agree, we all have to take losses at times...that's why scalping these days is tougher, and yet, I find that sometimes holding a bit longer seems to be beneficial ..avoid getting whipsawed, of course.

What we try to do is ascertain which stock in a pair is the most valuable, based on fundaments, primarily book value. We generally short the "growth" type stocks with high P/E's and high price to book ratio's,,,,,and then, if that stock goes against us, we determine that the likelihood of the pre-determined pairs price (the "spread price" which you are an expert on with options) of "coming in" is a good risk reward play.

How many times do you sell a call, only to have it go against you based on stock movement, and then buy the same strike next expiration out...with a better theoretical buy price, or to vertical the call? Similar approach with equities, with valuations based on fundamentals vs. black sholes, volatility, etc. ?

Both strategies seem to be working...

back to you..

Don

donbright on yahoo IM, if you care.
 
Quote from Don Bright:

Hi Mav...in some world's I would have to agree, we all have to take losses at times...that's why scalping these days is tougher, and yet, I find that sometimes holding a bit longer seems to be beneficial ..avoid getting whipsawed, of course.

What we try to do is ascertain which stock in a pair is the most valuable, based on fundaments, primarily book value. We generally short the "growth" type stocks with high P/E's and high price to book ratio's,,,,,and then, if that stock goes against us, we determine that the likelihood of the pre-determined pairs price (the "spread price" which you are an expert on with options) of "coming in" is a good risk reward play.

How many times do you sell a call, only to have it go against you based on stock movement, and then buy the same strike next expiration out...with a better theoretical buy price, or to vertical the call? Similar approach with equities, with valuations based on fundamentals vs. black sholes, volatility, etc. ?

Both strategies seem to be working...

back to you..

Don

donbright on yahoo IM, if you care.
More...

Don, Don, Don. LOL. You can't compare trading soft deltas in options to hard deltas. Apples to oranges.

Don, look, I understand what you are doing. I understand that it will work most of the time. The problem is you have a false sense of security with such a strategy. Sooner or later, the piper comes calling, and he is going to want to get paid. And he usually is going to ask for everything you've got.

I think one of the problems here is you are struggling to admit that the edge in equities, as we knew it, is gone. Yes, with bullets and tape reading, there was an amazing edge to be had by those who could do that. It truly was remarkable. But like any edge that is very narrowly based, it has moved on to edge heaven.

Since your firm has a business model that is purely structured around equities, you guys are fighting to not let it go. That is understandable. But I really see you reaching here. Especially when I see you using P/E ratios and fundamentals to justify a pair trade that is suppose to last hours or days.

Don, I think you guys would be better served opening up a poker school. I'm dead serious. A lot of money to be made there and you and Bob's experience in that arena actually adds value to the unexperienced. Stock trading is dead.
 
Quote from Maverick74:

Don, Don, Don. LOL. You can't compare trading soft deltas in options to hard deltas. Apples to oranges.

Don, look, I understand what you are doing. I understand that it will work most of the time. The problem is you have a false sense of security with such a strategy. Sooner or later, the piper comes calling, and he is going to want to get paid. And he usually is going to ask for everything you've got.

I think one of the problems here is you are struggling to admit that the edge in equities, as we knew it, is gone. Yes, with bullets and tape reading, there was an amazing edge to be had by those who could do that. It truly was remarkable. But like any edge that is very narrowly based, it has moved on to edge heaven.

Since your firm has a business model that is purely structured around equities, you guys are fighting to not let it go. That is understandable. But I really see you reaching here. Especially when I see you using P/E ratios and fundamentals to justify a pair trade that is suppose to last hours or days.

Don, I think you guys would be better served opening up a poker school. I'm dead serious. A lot of money to be made there and you and Bob's experience in that arena actually adds value to the unexperienced. Stock trading is dead.
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Mav, Mav, Mav...now you're cracking me up...the options edge has gone away, and many of the floor traders have "gone back to the future" by trading equities...how much money is made with program trading. When people learn the true valuations of conversions and reverse conversions, they begin to understand that since everyone has access to the same "sheets" for option values, even on Track Data, etc., and since it's harder to make money with options, again...they tend to trade equities.

I truly respect your opinions, but once again, I can only use the facts that I see..and our pairs guys do great..without the overall market risk. As compared to ratio spreads on stocks that could have multi level buyouts or simple big moves, I honestly feel that our money is safer with pairs than with most of the options spreads.....

As always we can "agree to disagree" but...since we can choose any business model we want, trade any security we like, and find that longevity of traders is paramount to survival, it may show our sincerity when we want our traders to focus on equities. Heck, we could buy a futures firm or options firm, or start our own...and Alaron and others have done well, but with our traders doing well, we "don't want to fix what ain't broke"....

All that being said, you never know how we may all have to Adapt, as we always have.

(No fight here, just differences of opinions, and I respect yours).

PS..are you in Chicago? I'm planning a trip there, and would love to buy you lunch and chat.

PSS..we may particpate with one of our traders, Ron Rose, in his poker training... http://www.ron-rose.com/

Don
 
Quote from Don Bright:


PS..are you in Chicago? I'm planning a trip there, and would love to buy you lunch and chat.

PSS..we may particpate with one of our traders, Ron Rose, in his poker training... www.rone-rose.com

Don
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Uh oh. I've seen this move before. LOL. Now Don throws out the lunch invitation. What do you guys think? Is he trying to buy my soul? Is he trying to buy my silence? If I have lunch with him will I come back to ET and become a pair trading chatter doll? LOL. Or will my body be found in Lake Michigan courtesy of the Bright Brothers mafia?

Hmm. When are you coming here Don? I might have to arrange for a security detail, undercover of course. I think lunch could be arranged.
 
Quote from Maverick74:

Uh oh. I've seen this move before. LOL. Now Don throws out the lunch invitation. What do you guys think? Is he trying to buy my soul? Is he trying to buy my silence? If I have lunch with him will I come back to ET and become a pair trading chatter doll? LOL. Or will my body be found in Lake Michigan courtesy of the Bright Brothers mafia?

Hmm. When are you coming here Don? I might have to arrange for a security detail, undercover of course. I think lunch could be arranged.
More...

As soon as the dates are firm, I'll PM you...and look forward to it. As you probably know, our office is above the CBOE, maybe lunch in the traders cafe (I assume it's still there)..and, don't worry, no additional security forces needed, the CBOE guys should do fine, LOL....

Don:)

Heading out for Kenny Rogers' show now, running late...back at all you all Monday......
 
doniz, ever thot about tradin' reports pairs; u know, sell the disappointment and buy the positive surprise...more predictable [to a certain extent] and might yield better than your auto stuff, innit.
 
Our Pairs "boys" do trade some ETF's at times, and when news happens, there is a tendency to get involved with the "over reactions" at times.

A lot of "A" vs. "B" stock, preferred or non-voting, things like that as well. Not really pairs with commodities or futures at this moment.

Don
 
Quote from Maverick74:

Don, Don, Don. LOL. You can't compare trading soft deltas in options to hard deltas. Apples to oranges.

Don, look, I understand what you are doing. I understand that it will work most of the time. The problem is you have a false sense of security with such a strategy. Sooner or later, the piper comes calling, and he is going to want to get paid. And he usually is going to ask for everything you've got.

I think one of the problems here is you are struggling to admit that the edge in equities, as we knew it, is gone. Yes, with bullets and tape reading, there was an amazing edge to be had by those who could do that. It truly was remarkable. But like any edge that is very narrowly based, it has moved on to edge heaven.

Since your firm has a business model that is purely structured around equities, you guys are fighting to not let it go. That is understandable. But I really see you reaching here. Especially when I see you using P/E ratios and fundamentals to justify a pair trade that is suppose to last hours or days.

Don, I think you guys would be better served opening up a poker school. I'm dead serious. A lot of money to be made there and you and Bob's experience in that arena actually adds value to the unexperienced. Stock trading is dead.
More...

I agree with Maverick.

Pairs/basket trading is all about exploiting short-term market inefficiencies.
Headline fundamental ratios you can get on Yahoo like P/E, etc...
Are completely useless for this.

And I agree with Don...
ETFs and other poorly understood or ** complex ** securities...
Are where all the market inefficiencies are.
People "pair trading" large caps will have marginal returns at best...
But, of course, guys like Don always get paid first no matter what happens.
 
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