Yes I believe you are correct about both terms. In response to your assertion that synthetics are more efficient, well I will have to think about it a bit. One thing that occurs to be relates to risk. If I have a spread on and a news event hits the wires (this has happened to me), then it is possible for one leg to profit or (lose) in excess of the other (if left to run). However I do have the option of altering the position and if there is continuation, benefiting from the move. With a synthetic position, especially if I alter the options portion, I am likely to lose the profit to transaction cost. Lefty
lefty if you are playing for regression of x vs. y and u put it on for $3 thinking it will go to 2.5 and news causes the pair to go to 5, how will repairing it help? You are basically cooked. Yes u can try to scalp it back and "trade around it" but still you would be trading from that news event on down $2. Certain synthetics can be created where all u have to do is await 1-2 weeks and the options will eventually catch up to the $3 due to theta.
Maestro, Please understand that pair trading is an extremely profitable strategy - for the guys charging the commissions. Correct me if I'm wrong, but it is my understanding that Pairco charges an average of .012/share commission on their traders, with Bright Trading getting a piece of the action. This is therefore a win-win situation, both for Bright and Pairco. While we're at the topic of pair trading, can we talk about the GM/DCX pair and how many people blew out trading it?
GATrader: Yes, you are correct, and in a market where vol has collapsed to such low levels, one would expect it to catch up pretty quick. Thanks Lefty
Well I look at these strategies as tools only. Now real significance other than that. Ozzy if you are affected by this deeply by the concept of pairs trading, try thinking of chinese midgets working in a post office. Imagine two chinese midgets, one standing on the shoulders of the other, working a postal counter job. Just thinking of them with their little faces contorted and red, yelling in chinese at the customers, should divert you from your unpleasant reaction to pairs trading. Lefty
A good nights sleep, some profits off the open and ready for another day of limited action in the market... summer is close Ozzy... I can't understand how people trade momentum. Everytime you enter the position you have to pay up and give the bid ask spread away. If they are wrong, they just purchased the worst possible price, plus they have no defined risk to reward levels (how profitable will the trades be?). This trading method just doesn't work for me and my personality. That being said, I am sure there are some traders who still do very well trading this strategy. Part of trading is approaching markets in a way that works for each individual trader. Something may not work for you, but may work for others. reg... One of the skills that we teach in capital management. The golden rule of trading is 'always be able to trade again tomorrow'. Yes traders got hurt trading the GMDCX, but most managed their capital to still be trading today. Every strategy has bad trades, learning how to manage them is one of the topics of our seminar and a key to long term success. Our seminar will start from beginning pair trading strategies and work our way to advanced techniques. The idea behind all education is to find things that work for each individual trader. I will be trading in the Las Vegas Bright office until Wednesday of the following week. I open it up that anyone can come and watch me trade if they take the seminar. Cheers, Darren