How to Make Money Trading Spreads

This past Wednesday we held a webinar about how to make money trading spreads.  Thanks to everyone who joined the webinar.  If you missed it, you can find the replay at the bottom of this post.

The webinar was in response to record numbers of people viewing our Trading Like a Math Geek webinar last month.  Viewers found it interesting, but the majority of questions we got were something like, "Great.  How can I use that to make money?"  

In this month's webinar, we talk about developing your own spread trading strategy.  Spread trading is a very broad topic and generally involves capitalizing on relative movements between connected securities.  Connected can mean a lot of things to a lot of people, but a good way to get started with spread trading is by using the mathematical connections we talked about in the last webinar.  

How do you make money trading spreads?

Written by Jennifer Galperin. Follow me on Twitter and StockTwits

Two Things I Like About The Avon Spread

I like the amount of potential energy embedded in the 1 * $SPY - 4 * $AVP spread. I also like the $AVP stock price spike that happened this morning.

I am thinking we are about to get a good run in this situation. I am short the spread (short SPY, long AVP) and I am also long the stock outright.

Do you like this spread?

Written by Michael Bigger. Follow me on Twitter and StockTwits.

 

Align Technology In Play Spread

I am watching this in-play spread this morning. I define the spread as 2 * ALGN - 1 * XPH (S&P Pharmaceuticals ETF). You can view this spread within our analyzer here.

Good one? 

Written by Michael Bigger. Follow me on Twitter and StockTwits.

Verifone Spread Gaining Momentum

I think if this 5 * QQQ - 7 * PAY $spread, which is currently trading at $106, trades below $100, we should have the momentum in place to push it down to its average of $70 or much lower. If you look at the chart of QQQ vs PAY (graph at the bottom of the image located below), you can see how much potential energy is embedded in the spread. We are short this $spread.

 

Makes sense? Click here to view this spread in the Spread Analyzer.

 

Written by Michael Bigger. Follow me on Twitter and StockTwits. 

 

 

Professional Traders: New Trading Tool

I want to share with you a trading tool that I built in MATLAB.  I find it quite useful for backtesting a statistical arbitrage strategy on a particular spread.  For example, take the spread 4*FDX-5*UPS.  Here it is in Spread Analyzer.

The code takes inputs like entry levels, exit levels, and stop-losses.  The output is a graph that looks like this, where the blue line is the level of the spread, the green line is a moving average, and the red line is the cumulative P&L of the strategy: 

Using this tool allows you to test your parameters to see which entry levels, exit levels, and stop-losses as well as which lookback periods perform the best on each spread.  It can also be embedded in a script so you can run it on a portfolio of spreads for the same parameters.  This would allow you to analyze your parameters quickly over a larger group of spreads.

What do you think?  Would you want to have access to this tool? Anything else you would want this tool to perform?

Written by Jennifer Galperin.  Follow me on Twitter and StockTwits 

Early Holiday Gift to Our Math Geeks

Thank you to everyone who attended our webinar last week and watched the replay. We had record numbers of viewers, so we know a lot of you are interested in learning more about statistical arbitrage spread trading.  If you are looking at candidates and having trouble finding any that are cointegrated, we are giving out an early holiday gift! Follow this link to find a sample scan with many cointegrated spreads.  In fact, there are so many, you will probably wonder how to narrow down the list.  In that case, here are two videos that will help you identify profitable spread candidates in this scan. Enjoy!

 

Don't forget to send us your candidates on twitter using the "Tweet" button on Spread Analyzer.

 

Here is an updated free scan for 1/11/2013 

 

Michael Bigger (@biggercapital). Follow me on twitter and StockTwits.

Jen Galperin (@slimshappy).  Follow me on twitter and StockTwits.

   

P.S. Here are Jennifer's tweet about her favorite candidates : I tweeted today some of the trading candidates that I found from the scan Michael circulated on the blog. If you are interested, take a look and let me know which ones you like. My favorite is probably $USO $OIL. my candidates

 

 

 

Update on Sunday, January 13, 2013 at 1:42PM by Michael Bigger

New free scan for 1/11/2013 here.

Trading Like a Math Geek

On Wednesday we held a webinar about Statistical Arbitrage Spread Trading.  We had a lot of people tune in, and there were some great questions.  Thanks to everyone who attended.  If you missed it, you can see the replay at the bottom of this post. 

Statistical Arbitrage spread trading is a way to harness your inner Math Geek to make more money trading.  There are a lot of mathematical concepts, but you can design your trading strategy to be very mathematically strict or just use the mathematics as a framework to exploit relative value opportunities.  It is up to you and your trading style.  In the webinar we discussed the mathematical concepts of cointegration, zscore, and half-life.  We went through a real-life example using the spread 1*BOH - 2*PACW.  You can bring up this spread in Spread Analyzer using this link. You can also look at some of the other spreads we talked about such as FDX and UPS, PEP and KO, or try coming up with some on your own. When you bring them up in Spread Analyzer, hit the "Tweet" button near the top of the output page and include my twitter id @slimshappy so I can see what spreads you are looking at. 

Please send me any feedback or questions on twitter or post them here.  I hope you can attend our next webinar!

Written by Jennifer Galperin.  Follow me on twitter and stocktwits.

Simple Concept, Big Money

In our pursuit of stock trading profit, we view securities being connected to each other by a spring force. This force is invisible but very powerful. When one security moves, other securities are pulled in the same direction by the spring force this stock exercises on other securities at varying degrees.  Because the connection is flexible like a spring, the movements are not always 100% in sync, and that is where the trading opportunities come in.  When you see one security moving, you can take a position in other securities connected to it.  Understanding the force that connects them together is essential to exploiting the opportunity.  Because there is a lag in the pull this force is somewhat predictive. Think about it this way: You are tenth in line waiting for a traffic light to turn green. I bet you that when the first car gets going you won’t be far behind.  You may even find yourself stepping off the brake when you see the light turn green, you don’t wait until all the cars have gone through the light!  With the elastic force, you can anticipate market movements ahead of the crowd, and elevate your trading to the next level.   

These laggish pulls have all kind of wonderful applications in pairs trading, signal building, options trading, and so forth.  Depending on how you think about the spring force, you can find many different ways to interpret and exploit these opportunities.  

 

Can you think of one way to incorporate this in your trading strategy?

 

Written by Michael Bigger. Follow me on Twitter and StockTwits.  

The Right Tool for the Job

Any contractor will tell you that you need to have an assortment of tools in your toolbox to get a project done.  Each job requires a specific tool.  When you need a Philips screwdriver, hammer just will not work.  

In trading, each of our strategies is a tool.  Each one works during certain market conditions, but not every strategy can work for every market condition.  Many people are struggling to make money this week because they are using bull market, low volatility strategies.  There is a tendency to try to reinvent the tool, re-work it so it will be effective in all market conditions.  Instead, I think it may be time to put some of those strategies back in the toolbox for the next bull market.  Let's go back to the toolbox in search of some tools for volatile markets.  

For me, when volatility is increasing I find that I need to put on small positions and leave room to add more if levels get worse.  I also find I need to let my winning trades run more.

What trading tools do you use in volatile markets?

Written by Jennifer Galperin.  Follow me onTwitter and StockTwits. 

Spread Trading Fundamentals

On Wednesday we hosted a webinar about Spread Trading Fundamentals.  Below is the replay of the webinar.  We had great turnout, including lots of first-time attendees.  We talked about how to set up and trade spreads, and we discussed how to use Spread Analyzer.  As I said in the webinar, if you are new to spreads then you have definitely come to the right place.  

Spreads (or pairs) can really help you visualize arbitrage opportunities where one stock is trading cheap and another is trading expensive on a relative basis, as I discussed in my CMS-DTE example in the webinar.  Our goal is to make it as easy as possible for you to trade spreads by providing all the tools you need for finding, tracking, and recording your spreads.  Whether you are new to spread trading or experienced, we have tools that can help you.  

If you want more information about Spread Trading, please explore our site.  Our How to Trade Spreads handbook is extremely useful to find out more about everything from spread trading fundamentals to more advanced topics like statistical arbitrage, cockroach theory, and more.  Please click on SpreadTraderPro to find out more about SpreadTraderPro and the handbook. 

Please stay tuned for more Spread Trading webinars, including an exclusive bonus webinar later this month for SpreadTraderPro members only!  Our next general webinar will be in early November.

Written by Jennifer Galperin.  Follow me on Twitter and StockTwits.