STOCK PAIR TRADING
A brief overview of this exotic investment option
Stock Pair Trading is a simple system where the trader determines which stock of a pair will perform better. Up or Down markets – It makes no difference returns are based solely on the relative performance of two assets. Returns are based on the divergence of performance between the pair and run up to 300%
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As you can see in this example trade these two assets have diverged widely and therefore the payouts are extreme. Very low return for the asset that will almost certainly expire ITM and a very high payout for the asset which is more of a “longshot” to finish ITM.
This trading structure allows for some amazing risk control and trading strategies. Especially when employing multiple pair trades at once. There are two main types of pair trades: Fixed return options Floating return options For the fixed options the broker assigns odds as to the relative performance of two assets at the beginning of a period and then fixes returns based on those perceived odds. For the floating return options the two assets are normalized and set at equal, 50/50 odds and payouts at the beginning of the given period and then those returns are allowed to freely float as the assets begin to diverge in performance. It is actually a very simple process while also allowing for some very sophisticated strategies. Making it great for both beginners and more advanced traders. Lets look at some examples shall we?
This is an example of the fixed option type from Stockpair. You can see that the performances were not normalized at the start of the period. Instead they are normalized as soon as you place your trade with the returns fixed based on past performance and current sentiment. In this case, 38% return on an apple play and an 81% return for a NASDAQ play You can simply search around the various asset pair looking for the returns you want. Or stick with selected pairs and take what’s on offer for their returns.
Here’s an example of the floating pair options contract. In this case you see that these assets were normalized at the beginning of the period. They and are allowed to float freely, along with their returns after that. This structure creates a wide variety of returns available at any given time and for any given period. A very nice advantage of pair trading. With the floating options, however, there are only three time periods to choose from. Today This Week And This Month
Another floating pair options example. This time with the ebay/amazon stock pair trade. Note the “sentiment” bar at the bottom of the screen. This is the current split between ebay options contract buyers and amazon options contract buyers. We frequently will place trades going against this sentiment if it gets to extreme levels. Any way you choose to use it, it is a nice feature to have.
And one last floating pair trade example. We wanted to include this one simply to help show the range of returns available on the wide variety of underlying assets. As you can see these two assets have tracked very closely over the time frame of this pair option. As a result, the return rates are also nearly equal. However, look at the sentiment. It is nearing extreme levels if not there already. Sentiment alone though should never determine a trade. There may be a very good reason for the divergence. Do your research before any trade.
Stockpair offers a wonderful resource center for all things related to stock pair trading.
A daily updated blog with stock market updates and analysis, pair trading tips and tricks, and much much more.
An incredible selection of stock pair to choose from. This isn’t even all the A’s! Also offers pair including commodities and indices.
ď śWe had a lot of fun trading pair options with Stockpair and trading their platform. You can check them out here. ď śOr visit us for more information on binary options and pair options, and read our full broker reviews.