Using fixed relations
- Thread starter uexkuell
- Start date
Thank you for answering so far.
Not sure whether I could make some points clear so far:
- It's only the relation between 2 symbols that seems to be fixed, never know whether both will be going up or down.
- It has to be an intraday strategy. Never know what the relation will look like at open next day (might shift anywhere overnight).
With options I am absolute newbie. Hope you don't mind if I have some questions therefore.
Not sure, what you mean here: Buy at the end of day?
(or just making fun?)
Sorry, can't see how pairs trading with the underlyings could use the relation.
In the hypothetical example (AAPL/ORCL) data might look like:
1h: AAPL +0.1% ORCL +0.2%
2h: AAPL +0.2% ORCL +0.4%
3h: AAPL -0.1% ORCL -0.2%
4h: AAPL -0.5% ORCL -1.0%
Any swing to either side just followed but with constant amplification.
Unfortunately I cannot spot any sure signs that a reversal to the other side (+ => - or vice versa) takes place. I think for a mean reversion strategy I'd need such signs.
Not sure whether I could make some points clear so far:
- It's only the relation between 2 symbols that seems to be fixed, never know whether both will be going up or down.
- It has to be an intraday strategy. Never know what the relation will look like at open next day (might shift anywhere overnight).
With options I am absolute newbie. Hope you don't mind if I have some questions therefore.
Quote from spindr0:
Buy calls on up days and puts on down days
Not sure, what you mean here: Buy at the end of day?
(or just making fun?)
Sorry, can't see how pairs trading with the underlyings could use the relation.
In the hypothetical example (AAPL/ORCL) data might look like:
1h: AAPL +0.1% ORCL +0.2%
2h: AAPL +0.2% ORCL +0.4%
3h: AAPL -0.1% ORCL -0.2%
4h: AAPL -0.5% ORCL -1.0%
Any swing to either side just followed but with constant amplification.
Unfortunately I cannot spot any sure signs that a reversal to the other side (+ => - or vice versa) takes place. I think for a mean reversion strategy I'd need such signs.
Here are two sites to read. Perhaps there's something of interest there for you. Perhaps they're a meaningless waste of time.
http://luminouslogic.com/a-pairs-trading-example.htm
http://www.investopedia.com/articles/trading/04/090804.asp
First of all, I don't think you will ever find a correlation between 2 stocks prices that always works exactly (other then Ultra EFTs vs. ETF, etc). but here are my thoughts.
For simplicity, pretend AAPL and ORCL were each $50.
The problem even if you know that ORCL will move 2X what AAPL will is that the options will be priced for that - in other words, the ORCL options would cost more then the AAPL options in this case (btw I think it's AAPL that would probably be more volatile then ORCL, but that's a different point).
First of all, you said it's intraday, right? Lets say they both open at $50 on expiration Friday - IF and that would be a big IF the options were priced the same, you could sell a 50 call on AAPL and buy a 50 call on ORCL for even money. If AAPL went up $3 and ORCL went up $6 then, you would have a nice profit. If AAPL fell $2 and ORCL fell $4, you wouldn't lose anything. If you were bearish going into the trade, you could do the same thing with puts and reverse the numbers. So, you could also sell a straddle on AAPL and buy one on ORCL (again if it was even money and was certain that ORCL would move 2x as much as AAPL).
Again however, I don't think there is ever a correlation that strong and consistant between 2 actual stocks - and with ETF, the ultras and 3X Bear/Bull do have higher options premiums then the standard ETFs, thus making it impossible to automatically profit so easily from the relationships.
JJacksET4
For simplicity, pretend AAPL and ORCL were each $50.
The problem even if you know that ORCL will move 2X what AAPL will is that the options will be priced for that - in other words, the ORCL options would cost more then the AAPL options in this case (btw I think it's AAPL that would probably be more volatile then ORCL, but that's a different point).
First of all, you said it's intraday, right? Lets say they both open at $50 on expiration Friday - IF and that would be a big IF the options were priced the same, you could sell a 50 call on AAPL and buy a 50 call on ORCL for even money. If AAPL went up $3 and ORCL went up $6 then, you would have a nice profit. If AAPL fell $2 and ORCL fell $4, you wouldn't lose anything. If you were bearish going into the trade, you could do the same thing with puts and reverse the numbers. So, you could also sell a straddle on AAPL and buy one on ORCL (again if it was even money and was certain that ORCL would move 2x as much as AAPL).
Again however, I don't think there is ever a correlation that strong and consistant between 2 actual stocks - and with ETF, the ultras and 3X Bear/Bull do have higher options premiums then the standard ETFs, thus making it impossible to automatically profit so easily from the relationships.
JJacksET4