THE ARBITRAGE AND SPREAD TRADING THREAD

[spreadem]

quote from nyse_trader:

I used to trade SPY/DIA, but found that the spread trended more than I was expecting

Sure it does trend but not like the es/nq spread.

I've also experimented with a "spread" strategy that included more hedging than anything. After all if I buy dow stocks and sell dow futures, am I spreading, hedging or arbitraging?

Hmm. The separation lines are not so clear.

 

[NYSE Trader]

A hedge usually means that you want to get neutral in order to be protected and stay in a trade that may go against you. Spread, or Pair trading is known as statistical arbitrage and uses various methods such as capital distribution, scalping, etc. Merger trading is known as risk arbitrage and its capital and exit strategies are different as well. Pure arb is used by bigger entities than us who trade the underlying securities against the derivitives, such as index arb.

 

[howellpar]

I've traded pairs (NYSE/DJIA stocks) for over 10 months quite profitably. Key is knowing which stocks to 'pair' against each other, entry points, profit targets, historical relationship, access to enough capital for 'mid-term' (1 - 10 days) 'carry', and the discipline to 'let it happen'. It's been very good to me.

 

[candletrader]

Quote from spreadem:

quote from nyse_trader:

Sure it does trend but not like the es/nq spread.

A good example of this phenomenon was today 2/25/2003...

 

[NYSE Trader]

es/nq are too different for good pair trading... better to trade tech stocks against nq

 

[spreadem]

quote from howellpar:

Key is knowing which stocks to 'pair' against each other

Yes and for that I prefer to trade index vs index. Keeping it simple!

Who wants to stay up all night looking for pairs that have correlations that may or may not be reliable in the near future?

 

[candletrader]

Quote from NYSE Trader:

es/nq are too different for good pair trading... better to trade tech stocks against nq (or qqq)

Given my preference for spread convergence type trades, I would concur... however, that is not to say that one cant trend trade the ES/NQ spread, benefitting from the leg protection not afforded to a strategy that only trades the outright...

 

[howellpar]

Spreadem:

You are absolutely right. But, I just couldn't get the index's (sp?) to trade as well as the NYSE stocks I use. Not enough movement within my time frames.

Thanks for the advice.

 

[NYSE Trader]

Quote from candletrader:



Given my preference for spread convergence type trades, I would concur... however, that is not to say that one cant trend trade the ES/NQ spread, benefitting from the leg protection not afforded to a strategy that only trades the outright...

I've looked at trend trading pairs, but haven't been able to get out of a facilitating/contrarian mindset. I must be getting old.

 

[candletrader]

Quote from NYSE Trader:



I've looked at trend trading pairs, but haven't been able to get out of a facilitating/contrarian mindset. I must be getting old.

Nothing wrong with being a facilitator... you are in good company with the market makers