I was wondering. Say you went short Volkswagen in a pair, and were short when it skyrocketed recently. With a typical account percentage. What kind of account damage would that have done?
Well it depends when you entered and when you exited, there was a great statistical arbitrage opportunity after it skyrocketed, I mean how could that company be the largest company in the world, as it was that day, I don't trade euro shares, but I sure did wish I did that day, didn't take much to recognise that at 800- 1,000 euro it was significantly out of whack, but if I were short before that it could have done 10-20% a/c damage, depending on what I was long to counter that and when I would of exited because it did come back. Your've got to take this with a grain of salt though as this type of situation would only occur once in a blue moon, maybe less, quite possibly the largest short squeeze of all time.
I know there are a few books on pair trading, read one of them and was disappointed, honestly you can find everything you need on the net, here's a list of pair trading articles I keep in my favourites folder Pair Trading Articles
Exited one trade today; Sold ACI @ 16.05 Covered CNX @ 23.15 Opened 1 new trade; Long HES @ 50.72 Short APC @ 35.16
Jonny, do you go long and short the equal dollar amount? Or maybe you adjust for beta (or some other adjustments)? Do you use SSFs for pairtrading? Do you buy OTM options to hedge pairs (or at least short side)? Let's say short Volksvagen + long Porsche + OTM calls on Volkswagen (just example, not sure how much they correlated). HLB