Does anyone here pairs trade using options? http://www.schaeffersresearch.com/s...trategies+pairs+trading/Education.aspx?ID=255 Is it better to buy otm,atm or itm call and puts for pair trade and which expiry(3 to 6months) option do you choose to minimize premium decay? Or are CFDs better substitutes as leveraged pair trading instruments? http://www.catalystcorner.com/index.php?m=pair_tool Can this website or is there another website to rank/tabulate pairs based on CoIntegration% strength?
I am not a big fan of using options when pair trading. Aside from the fact that it isn't a hedge unless both sides are deep in the money. My main issue is the cost of the time horizon. Consider the following stock example, SAP/IBM in 2010: We see these dislocations being resolved in a 1 1/2 - 2 months time. An option can lose alot of value in 2 months. Also I don't like the bid-ask spread. (By the way, a limit order at the midpoint often gets filled.) Consider the following futures example, HO: Heating Oil / CL: Crude Oil in 2006: This spread couldn't have been any nicer to trade, but it took three months. (Red line where I would hypothetically have entered.) Here is another futures example, HO: Heating Oil / CL: Crude Oil in 2010: Here the spread was more difficult to trade. It took four quarters to get 1.5 sigma to 2.5 sigma with many false breaks. It then took another two quarters to revert. (Green lines show a failed and a profitable hypothetical trade.) When one is talking about months or years to realize a profit, I can't see using options. Consider the profitable HO/CL spread in 2010, Futures: 16% profit on margin. Entry long HO @ 2.1676 on 3/29. Exit HO @ 2.1319 on 7/22 P/L = -0.0357 Entry short CL @ 83.21 on 3/29. Exit CL @ 80.29 on 7/22 P/L = 2.92 Options: 48% loss on price of options. Entry buy HO September Call 2.17 @ 0.1828 on 3/29. Exit @ 0.0533 P/L = -0.1295 Entry buy CL September Put 83.50 @ 6.35 on 3/29. Exit @ 4.93 P/L = -1.42 The loss of time value can easily kill a profit. Thus options are quite unsuitable for pair/spread trading.
My rule is that if a pair shows a combined loss >5%, it is closed. It is mechanical, crude, and simple. Rare is the pair that comes back after being underwater 5%.
I can only resonate with Dr.Who Who knows it may even make money like he claims, but setting it up the way he has, makes it appear like a scam. If the software is as good as claimed, then people will be willing to pay for it. When a systems vendor forces all system signals to be executed through a single broker, it always looks suspect.
Thank you for sharing. Is that >5% of one side (ie avg loss 2.5% each side) of 5% of the sides added together (ie 5% avg loss each side)? Also, do you monitor whether you could have had a better exit on the eventual reversion of the pair?
Guys, he may have signed an Introducing Broker contract with the outfit he's forcing s/w users to go through. I was approached by DbFx about being an IB with them. Basically, every round trip would have paid me $10. You get quite a few people trading, and that could really add up to some $$$$$... Let's say 250 people take the "free offer" and the system pulls for example, eight trades on average every 24hours. If the IB was compensated at $10 per round trip, that's $40/day x 250 people = $10,000/day. Not too shabby especially being automated, meaning Jared doesn't have to mentor and hand hold. In addition, being automated, he KNOWS trades are going to be made vs. the discretionary trader. Food for thought. I like PTF, but this newest venture isn't passing my smell test.
Thanks for the clear explanation; So do you recommend CFDs if you want to pairs trade on leverage? Is there any website/software that list daily updated potential pairs based on ConIntegration ranking strength with statistically calculated possible convergence/revert to BBands 20MA(mean) within 50days?
To be honest with you, I didn't know what a Contract For Difference CFD was. It is much like a Futures Contract that never expires. It is traded OTC between the trader and a market maker. The initial margin is between 0.5%-30%. The tax effects are different from owning shares. More markets can be shorted. Since I am in favor of risk weighting, the ability to apply leverage allows one to balance the risks in their portfolio rather than focus too much on the dollars. Since I have never traded CFDs and am not familiar with the shenanigans associated with these non-cleared instruments, I can't recommend them personally, but I like the idea.
5% combined. I used to cls out positions if one side had a loss > - 8.5%, but that is meaningless if the other side is showing + 8.25% If pair is highly correlated, i.e. =>90% on 150day chart, and the trade has been open < 5 days, I will sometimes let it stretch > 5%. That's a judgement call once you know your pairs. I haven't monitored if my exits cld be improved, (but I probably should)