What Else Can We Trade Against This?
Sunday, May 8, 2011 at 5:19PMSometimes you have a particular spread trade in mind and you can’t do it for a variety of reasons: you already have too much exposure to one of the stocks in the pair, or you can’t get a borrow on the short side, or one of the stocks in the pair isn’t liquid enough, etc… When this happens it is time to look for a substitute. Earlier this week we were looking to buy $USO (United States Oil Fund) and sell $XOP (SPDR S&P Oil & Gas Exploration & Production ETF). In one of our accounts we couldn’t get a borrow on $XOP so we substituted $XLE (Energy Select Sector SPDR). We like $XOP better because $XLE is heavily weighted toward the major integrated oil companies while $XOP offers a broader based portfolio. But $XLE is good enough. As a matter of fact when we originally decided to trade the “Oil vs. Oil Companies” spread last year we did our first trade with $XLE, but later decided that $XOP was the better ETF for our purposes. So if for some reason you can’t trade one side of a pair, look for a substitute. You may even find a more suitable security.
As for the results of the trade, unfortunately it moved sharply against us with the big sell off in oil. But we’re confident it will rebound. Perhaps that will be next week’s topic.
Written by Norm Winer. Follow me on Twitter and StockTwits.
Reader Comments (5)
Michael, I was wondering if you considered XOP options ie selling deep in the money calls as an alternative to shorting?
We wouldn't sell calls. If anything we would buy deep in the money puts as a substitute for the short side, but you would pay up for the puts. You could do all your pair trades with options instead of stock but we haven't.
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