Apple and Salesforce.com Spread Temptation

In our statistically driven spread book we occasionally come across a spread that we had traded a few weeks before for a profit, which has returned to the price in which we originally entered the trade.  If the spread still meets all of our statistical criteria we will happily enter the trade.  But what do we do if all the criteria aren’t met.  It might be tempting to trade anyway, after all if the entry level is the same as it was two or three weeks ago, why not? But we believe the correct thing to do is to adhere strictly to our process. We started thinking about this earlier this week as a spread we had traded successfully in May, $AAPL - $CRM, approached the price at which we had entered the trade in late May.  But this time the stats said the spread was no longer cointegrated, and since cointegration is a major component of our trading rules we won’t trade this one again until it is cointegrated, even if it does hit the original level.

 

To be honest we haven’t always held fast to our processes, but we know we are better traders when we do.

      

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