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Spread Trading Strategies
- Thread starter bone
- Start date
Quote from cdcaveman:
Like a vol swap... sell vol in one and buy in another..
this is what i'm talking about... say trading one child against its parent index..
or constituents of a ETF or index against the etf or index..
so you buy vol in the index and short the vol in the constituents when their has been a vol spike in the constituents .. and vice versa..
anyone do this?
"If returns on two assets share common volatility components, the prices of options on the assets should be interdependent and the implied volatility spread should mean revert. We, first demonstrate, using the canonical correlation method, that there is a common component among the volatilities of the returns on S&P 100 and S&P 500 indexes. We then exploit this commonality by trading on the volatility spread between tick-by-tick OEX and SPX call options listed on the CBOE. Our vega-delta-neutral strategies generated significant profits, even after transaction costs are taken into account. The results suggest that the two options markets are not jointly efficient. "
this is a good article... "i think" Realative Strength of the Average True Range of a constituent against Relative strenght of the ATR of the basket/market/index etc..
http://www.tradestation.com/en/education/labs/analysis-concepts/rsi-volatility-spread
http://www.tradestation.com/en/education/labs/analysis-concepts/rsi-volatility-spread
Quote from cdcaveman:
How do you set up for diversion. I understand convergence. Short the higher priced security and go long the cheaper one.... its just the opposite for divergence?
I personally look for pullbacks in a spread that has been trending. For instance...uso/spy, qqq/spy, xhb/spy. All of these have been money on pullbacks. But entry can be tricky at times imo. Hey simple breakouts seem to work pretty well. Maybe im complicating it by entering off one of the underlyings lol.
Attachments
Quote from Shanb:
I personally look for pullbacks in a spread that has been trending. For instance...uso/spy, qqq/spy, xhb/spy. All of these have been money on pullbacks. But entry can be tricky at times imo. Hey simple breakouts seem to work pretty well. Maybe im complicating it by entering off one of the underlyings lol.
Is there any advantage margin wise for pair trading
Quote from cdcaveman:
How do you set up for diversion. I understand convergence. Short the higher priced security and go long the cheaper one.... its just the opposite for divergence?
I don't know what shanb means when describing his looking for "a pullback in the spread." Included in his response for sure is a movement in the spread. He has a picture of a "pullback" and maybe it is the same as mine (below).
Look at a two stock plots scenario: There WAS quite a distance between the two (the spread) and they now have converged together. Let's just say they converge so much (narrow the spread) they are superimposed on each other. If other charts justify this, you can go long the stock that WAS superior in the chart (the "higher" stock plot) and go short what WAS the inferior (the "lower" stock plot).
(It has nothing to do with "higher" or "lower" stock price or stock value. It is purely their respective plot positions on the chart.)
Mining for paired trades with HOT and HST:
(also posted on Trading forum / Charts of note)
This chart is a screen shot from mid-session today. Annotations applied an hour later.
Having gone flat on a notable chart for a pairs trade started Aug 1, by legging out of it a number of days ago, an opportunity may commence to leg back in.
Opportunity may present again with
Shorting HOT
Long HST
This recommendation intended for only myself:
When the terminus of these stock plots are narrowed in half the current distance between them as shown on this chart, begin accumulation of new position.
Again:
The recommendation is intended for myself and not meant to be for anyone else;
<img src=http://www.elitetrader.com/vb/attachment.php?s=&postid=3609580>
(also posted on Trading forum / Charts of note)
This chart is a screen shot from mid-session today. Annotations applied an hour later.
Having gone flat on a notable chart for a pairs trade started Aug 1, by legging out of it a number of days ago, an opportunity may commence to leg back in.
Opportunity may present again with
Shorting HOT
Long HST
This recommendation intended for only myself:
When the terminus of these stock plots are narrowed in half the current distance between them as shown on this chart, begin accumulation of new position.
Again:
The recommendation is intended for myself and not meant to be for anyone else;
<img src=http://www.elitetrader.com/vb/attachment.php?s=&postid=3609580>
Attachments
Reference my Aug 27 post suggesting the commencement of a new trade by accumulation of shares
Short HOT
Long HST
when the spread narrows in future days by half the distance at the terminus of the stock plots displayed at closing Aug 27.
The chart showed a 6% difference in the spread Aug 27 at closing. Today's close shows a 3% difference. The threshold is now met to begin accumulation. The opening date of this chart is Aug 1. But I entered the trade not at the start of the session on Aug 1, but much later in the session when the spread was more favorable to enter the trade. My tick meter showed at end of session today a significant, remaining spread necessary to narrow in order to get to the start of my original trade. A conservative approach would be to wait before biting. The potential, however, is so good for success that legging in Thursday should today's closing spread hold is reasonable, too; there is a big margin for error for early entry.
NOTICE: Be advised future posts by Deucy28 will be restricted to CHARTS OF NOTE in the TRADING FORUM (top of page of list of Forums)
<img src=http://www.elitetrader.com/vb/attachment.php?s=&postid=3611422>
Short HOT
Long HST
when the spread narrows in future days by half the distance at the terminus of the stock plots displayed at closing Aug 27.
The chart showed a 6% difference in the spread Aug 27 at closing. Today's close shows a 3% difference. The threshold is now met to begin accumulation. The opening date of this chart is Aug 1. But I entered the trade not at the start of the session on Aug 1, but much later in the session when the spread was more favorable to enter the trade. My tick meter showed at end of session today a significant, remaining spread necessary to narrow in order to get to the start of my original trade. A conservative approach would be to wait before biting. The potential, however, is so good for success that legging in Thursday should today's closing spread hold is reasonable, too; there is a big margin for error for early entry.
NOTICE: Be advised future posts by Deucy28 will be restricted to CHARTS OF NOTE in the TRADING FORUM (top of page of list of Forums)
<img src=http://www.elitetrader.com/vb/attachment.php?s=&postid=3611422>