The Lost Art of Spread Trading
Thursday, December 9, 2010 at 10:48AMI am repeating this story one more time…
When I traded single stock derivatives at D.E. Shaw, observing my boss trade S&P options fascinated me. He made money consistently though he took very little risk. He was a trading magician. He knew his options market, especially the S&P, and he knew how to trade spreads. He constantly traded in and out, squeezing juice out of the lemon. The lemon never ran out of juice! It was a wonderful thing—a winning trading method.
He started his career trading options for O’Connor & Associates, then worked for Swiss Bank before joining D.E. Shaw. All of them are/were great trading houses.
Most of the best traders I have met trade spreads. They spread different options, stocks versus stocks, indices, stocks against indices, etc. The number of combinations is endless.
The StockTwits stream is populated with one-dimensional, plain vanilla trading stories. Shouldn’t we step up our trading game a bit? I am still waiting for the day someone posts a chart on the stream displaying a two stock combo ratio. Let’s go!
Start looking at the trading world from an exchange of at least two securities. I buy this, and I sell that against it. You might not execute the transaction on these terms, but doing this exercise will help you in the following ways:
• It forces you to look at the economics of both legs.
• A spread removes some of the market noise from the equation.
• You will have a better basis for comparison and analysis.
• It will make you think and open up new areas for exploration.
• It will allow you to understand the word “hedge” in hedge fund.
Does this make sense to you? Did you learn anything?
If you are interested in learning more about spread trading please ping me. We are working on something cool for you.
Written by Michael Bigger. Follow me on Twitter and StockTwits.
Reader Comments (5)
http://jpotrading.blogspot.com/2010/11/prognosis-only-after-game-move-is.html
Thank God! I was starting to wonder if I was going about this the wrong way...doing mostly pair trades....and like you say the cyber space is full of one dimensional go long this or that tweets. Recently went long AKAM against sp500 as I blogged . (link above).
The best part of doing pair trades, I think, is I do not have to worry as much about guessing market direction. looking forward to whatever it is you are coming up with . rgds João Pedro Oliveira.
JPO,
Exactly! Reading your post right now!
Hi Michael, I am interested in learning about spread trading
What is a good place to learn about spread trading? I trade stocks but never even heard of trading spreads.
Awesome guys. I let you know when our program is in place.