B I didn't think you were into this sort of thing a man of many talents, you should've been on the list!
Jeez I only just remembered what you're previous handle was... you did this stuff as a day job right? Care to enlighten the rest of us on the hows and how nots to making dillions/squillions on stat/risk arb?
No. Bail. You shouldn't be trading a pair through earnings on one of the two, let alone both. And you shouldn't fixate on one pair. The nature of pair trading is lots of small gains and a few big losses. Essentially a short gamma or neg skew strat. You have to trade many independent pairs to dampen the few outlier losses. I have one pair that did 61 straight wins of 30 to 50 cents before it took its first five dollar loss. That is the nature of pair trading.
It was 1990-91. The first rule was to assume that you're trading outrights. The second rule was to never add to a loser -- you never know when the band will break. The third rule was to reduce size during reporting periods. Equity stat-arb is far riskier than any other spread-switch trade. Commit to a full position with a tight-stop. The mean-reversion koolaid is tempting, which makes it seem logical to add to losers. It's the same logic which makes fading price/oscillators so tempting in the "science" of TA.
yobo, An adage came to mind when I read your post "the market can stay irrational longer than you can stay liquid." Adding layers is part of many mean reverting pair strategies, however, alway be careful not to get married to a trade because it "should do this" or "supposed to do that". Good luck with everything.
I swear to god, ,you get more understandable by the day, I gave up years ago.... but now..... cheers old bean! fonejacker.tv
I would suggest to you as a new trader to know as much as possible about the stocks you trade and this includes when they are reporting earnings. I would also advise to just stay away from stocks during earnings or at least be flat at the end of the day. You can day trade pairs based on there daily strength, such as shorting xom (because of all of the recent negative news surrounding it) and buying cvx (because the day before gs upgraded cvx). That being said, if this style does not appeal to you and you prefer to continue adding to and reducing the position based on the spread price, then you should anticipate turmoil around earnings time and you should have a plan for the possible scenarios that could occur. You should have a game plan for xom beating and cvx missing as well cvx beating and xom missing and so on. If you have a good plan with predetermined actions to take given the scenario and you follow through you will have a better chance for success and you will be able to sleep at night. I also trade that pair but I do not currently have a position. If the spread between the two is the same after cvx reports I will add 3 to 4 layers here because it is so extreme and they are so highly correlated. I would suggest to you to not add to it until this time as well. Best of luck managing that trade.