Weekly Spread Re-Cap 4-15-2011

The bulk of the spread trading we do is based almost purely on statistical methods.  If a particular stock pair is co-integrated over a certain time period, the half life is reasonably short, and the spread between the pair is more than two standard deviations from its mean value we trade it.  This week we put on long 1 DRQ (Drill Quip), short 2 SDRL (SeaDrill Limited).  Both stocks are in the Basic Materials sector.  DRQ is in the Oil & Gas Equipment & Services industry, and SDRL is in the Oil & Gas Drilling & Exploration industry.  We typically stay industry neutral but we felt that the two companies were in similar enough businesses that we could relax this requirement.  We traded this spread in March and made almost $4 per spread while holding it for about three weeks.    On Wednesday our statistical software showed that it had become cheap again, so we bought it.  We were able to unwind it by Friday for a $4 gain.  We suspect the opportunity to trade in and out of this spread twice in a period of about thirty days was driven by the recent spike in oil prices coupled with the strong co-integration this pair has demonstrated over a period of more than ten years.

Written by Norm Winer. Follow me on Twitter and StockTwits.