Paired Trade - Page 4

Mr. Now · #31 05-31-2006, 10:11 PM

I for one wish Paluka could post some tutorials. It's pretty clear if you search his posts he is incredibly knowledgeable about derivatives and trading. All can benefit from this poster's experience and knowledge.

Mr. Now · #32 05-31-2006, 10:13 PM

Sheesh the market is going to hell in a handbag.

Sniper · #33 05-31-2006, 10:16 PM

[ QUOTE ]
I for one wish Paluka could post some tutorials. It's pretty clear if you search his posts he is incredibly knowledgeable about derivatives and trading. All can benefit from this poster's experience and knowledge.

[/ QUOTE ]

Still waiting on a followup to your Trading 101, MrNow...

Groty · #34 06-01-2006, 02:34 PM

As you may recall, I coverd the short leg of the trade (IWM) very nery the bottom of the panic selling. I simultaneously added to the long leg (the DIA) to reduce my average cost and play the rebound rally.

I sold the DIA position last Friday. I'm completely out of this trade.

Sniper · #35 06-01-2006, 06:35 PM

Thanks for the followup Groty...

Just wondering if you are thinking about, or under what conditions, you would re-enter your pairs trade?

Groty · #36 06-01-2006, 08:42 PM

It worked out well. I'll put it back on when the multiples between the two indices widen by more than 4x. This was the first time I've used two index ETFs.

Stocks I've done it with include: XLNX/ALTR, INTC/AMD, BUD/TAP, FNM/FRE, PMI/RDN, QLGC/ELX, AA/AL, and about 20 other pairs.

The problem with stocks is that the historical correlation can break down and you lose alot of money waiting for the relationship to hold. That happened to me a couple of years ago with FNM/FRE. For several years prior, the R-squared of the changes in the stock price of FNM and FRE was extremely high -- around 0.90. Anytime the two stock prices temporarily diverged from their normal range, you could put the trade on and consider it money in the bank that the historical relationship would hold. Then FNM got caught in the accounting scandal, and the relationship broke down. Too bad, it had been my favorite pair because it was so consistent.

Anyway, with the two ETF's I used, which mock indicies, the correlations are always going to hold to some degree. You don't have to worry about a company specific event screwing up the historical relationship. So I'm definately going to do more paired/relative value trades with ETFs in the future.

Good luck to you.