I do like to run statistical calculations against list of ideas posted by successful traders or investors. One list that I like quite a bit is the annual buy list at Crossing Wall Street. I ran calculation of the SPY versus each stock spread on our Spread Analyzer.
Here are the results:
My favorite spreads from this set is SPY vs MSFT and CA from a value perspective.
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?
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?
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?
New free scan for 1/11/2013 here.
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!