Sorting Your Stock Spreads Just Got Easier

You ask, we listen! On December 8 we wrote a blog post about our views on trading statistical spreads with stocks in the same industry. Since then, we have received tons of requests to provide you with the ability to sort and filter SpreadTraderPro's daily scan by sector and industry.

The industry information is now included with your SpreadTraderPro daily scan, at no additional charge! Not a member? Click here to find out more about our daily scan data, members-only forum, and exclusive blog.

If you agree with Jen's view in the blog post and think statistical arbitrage pairs should contain stocks in similar businesses, then we're making it even easier to find great trading candidates within a common industry or sector. If you agree with Michael's view that cash is king no matter what business the stocks are in, then you can still see all the same types of great trading candidates you've always seen. Either way, we think you will find the industry data helpful.

Happy Spread Trading!

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

Celebrating Bachelier

Bachelier, LLC is the name of my latest trading venture. I named the company after Louis Bachelier who was a French mathematician at the turn of the 20th century. He is credited with being the first person to model the stochastic process now called Brownian motion, which was part of his PhD thesis The Theory of Speculation, (published 1900). Bachelier's work on random walks predated Einstein's celebrated study of Brownian motion by five years (source here: Wikipedia). Read it, it is a fascinating story.

Bachelier's Brownian motion is the core mathematic concept behind options pricing and Monte Carlo simulations; the core mathematic concept behind modern finance.

Bachelier, LLC is a trading platform. As such it is a platform of trading experiments performed by human beings with the help of computers.

We are fascinated by the different forces influencing a stock price such as the statistical nature of its historical price, its Brownian motion profile (volatility), and the evolution of the intrinsic value of the underlying company. These forces and other forces drive the stock price at different time scales and the pulls create opportunities.

Then there is the interaction of time and people on these systems. People operating in a world in which information is getting almost perfect and free with friction decreasing rapidly. Not only that, with the advent of Twitter, we now have a global human network influencing the system as well.

We are learning about all this but we are far from understanding it very well. What do you think?

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

Spread Trading Fundamentals Video

On Wednesday we had our first Spread Trading webinar.  Michael gave an overview of the importance of spread trading as a trading tool, and I discussed fundamental concepts.  We had a great turnout.  If you attended, we hope you found it useful.  If you missed it, you can find the recording at the end of this blog post. 

Spread trading at its heart is a way to formalize something we all do anyway, which is to compare our profits (or losses) with our opportunity cost.  If I bought a stock because I thought it was cheap and it went up but the rest of the market went up more, did I really make a good decision?  In spread trading, you are trading this relative performance explicitly.  It is easier to identify pockets of value because you limit the number of factors to just the relevant ones for your particular trading thesis.  One security is cheap relative to another, or relative to the market, always relative to something.

There are many different types of spread trades.  There are options spreads (and within options spreads, there are vertical and calendar spreads).  There are futures spreads, stock spreads, statistical arbitrage spreads, and merger arbitrage spreads.  The list goes on and on.  You can even push the spread concept to value investing being the difference between the stock price and its intrinsic value.  The common theme is a view that one security will outperform the other.  Once you have this view, you can create a spread by buying the cheap security and selling the expensive one.

During the webinar, we got a lot of questions about statistical arbitrage spreads.  The next webinar will focus specifically on stat arb spreads and the related mathematical terms and concepts (such as cointegration, correlation, z-score, time frame, etc.).  If you are a member of SpreadTraderPro, the “How to Trade Spreads” handbook that you received when you joined has a lot of information on this topic.  In addition, your daily scan contains tons of cointegrated spreads every day.  If you are not a member, you can sign up or wait for the March webinar to learn more about this topic.  For details, sign up with our free Spread Analyzer to ensure you are on our mailing list.  Details will be coming soon.

Thanks to everyone who participated in yesterday’s webinar.  If I did not get to your question yesterday, I hope you found the answer in this blog post.   If you have more questionss, please leave them as comments to this post or send me a tweet.

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

Spread Trading and Takeovers

This morning I came in short TLEO (Taleo) at about $39.50 as part of a spread I initiated yesterday.  Oracle announced this morning that it was buying TLEO for $46 per share.  Bad news!  So how do you prevent something like this from happening?  The short answer is you can’t.  But there are a couple of things you should be doing to lessen the pain and decrease the frequency of such events.  First you should create a diversified portfolio that can withstand such a move.  TLEO represented less than 2% of the portfolio.  Second, you should be certain that your process is not getting you into situations like this on a regular basis.  If it is, you might want to re-think your strategy.  In our case it hasn’t.  Sometimes we’ve been on the winning side of these events.  If your process is sound and your portfolio is diverse, events like this will occasionally occur, but they shouldn’t prevent you from being profitable over the long run.

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

Spread Trading Opportunities with International Stocks

There are spread trading opportunities with foreign stocks too.

Look at this spread of Reckitt Benckiser (RB.L) and Unilever (ULVR.L). Both companies operate in the same sector/industry and they produce almost the same type of products - cleaning products, medicines, personal hygiene etc. Both are FTSE 100 companies. 

Not a while ago the spread 1 * RB.L - 1.7 * ULVR.L was trading below -400pts with a standard devaiton of 2.5 below the mean. Today the spread is at fair value fairly close to the mean. 

Had you purchased the spread at -400 and took profit today, you would be up: current spread - entry = 43 - (-400) = 430pts. 

Here is a sample computation: (Note: Negative for Short-Sale)

The computation in a nutshell, if you Bought 1000 shares of RB.L/Short-sold 1700 shares of ULVR.L on 01/04/2012 and exited today (02/06/2012), you would have made a profit of £4,311.81.

You can view the spread here - http://goo.gl/50RsL

Bigger Capital is commited to developing its techology platform to make it easier for users all around the world to identify these opportunities. Stay tuned!

Written by Aris David. Follow me on Twitter and StockTwits.

Spread Analyzer Now Computes Global Tickers!

Dear Spread Analyzer User,

You asked; we listened! Our visitors come from around the world, and our stocks should too. By popular demand, we've enabled global tickers in our Spread Analyzer. Now you can use the Spread Analyzer to analyze stock pairs from many different countries. As always, this tool is free to use! We invite you to see for yourselves what interesting spreads you can find now that the world is literally open to you.

Here is a partial list of the countries available, with some sample tickers to help you input the stocks:

Good luck!

–The team at Bigger Capital

Trading Spreads Podcast

Jennifer and I had the opportunity to talk to Jared Mast about Spread Trading and our two new spread trading tools, the Spread Analyzer and SpreadTraderPro. Jared blogs at Speculate The Markets. 

Here is the recording of our discussion:

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

How to Use The Spread Analyzer Video

How my Imagination Turned into Trading Profits

This post was inspired by watching a two year old girl paint her cheeseburger, with ketchup, using a French fry. 

I got into the trading business as a day trader and expanded into a swing trader.  Along the way I never thought I would be trading spreads between two different securities.  Play around.  Make lots of mistakes.  Color outside the lines.  Be creative.  These are some of the fundamentals that I learned from trading spreads and much like the kid and her ketchup, I knew that I was on to  something really cool.

Michael Bigger introduced me to the concept of staying small and rotating your inventory over and over until your value compounds and compounds towards infinity. Value increasing along the money, knowledge, satisfaction, and doing great work vectors. Sounds great but it was only when I actually tried it that I realized it was possible.  Spread trading allows you to see relative value between the two sides of the trade, and play with your food where you previously were taught not to.  Looking at the market from this perspective reminded me that everything I've done well in my life I've done with my imagination.  Imagination is limitless, and if your approach to the market requires your imagination, shouldn’t that make your profits limitless too? I liked where this was going.

So I went and played with my trading.  Put on a trade, closed the trade.  Learned and adjusted.  Put on a trade, closed the trade.  Learned and adjusted.  I put on a stock vs. a stock trade.  Then a stock vs. ETF trade.  Then a ETF vs. ETF trade.  I made directional trades like I always do and then I made statistical mean reverting trades where they made sense.  All those trades were like inventory in a store and I moved them out when they hit my profit or loss level, replacing them with a new inventory of trades.  I stayed small to keep rational and that rationality allowed me to stay creative.  Trading became a process rather than a result. 

If I knew the road to trading success began with sticking my fingers in food I probably would have done it a lot earlier in my career.  Now that I've found a community of traders that share a creative outlook in trading, I have the confidence and support to make the adjustments that I always knew I could. 

This is a guest post written by Eric Gong. Eric is a member of the SpreadTraderPro community. Follow Eric on Twitter and StockTwits.

Elevating my Trading Business

Here is what I intend to do this year to improve my trading business.

 

1. Improve my spread trading strategy in incremental ways.  Small improvements compound over time.  It's a marathon.  I must be alert to the small steps I need to take to increase my gain-loss ratio.  How can I find more spreads to trade?  How can I better utilize technology in finding and executing spreads? I want to experiment with all these levers.

 

2. Be more active in social media, both on the giving and receiving ends.  There are lots of smart people out there with good ideas.  Bigger Capital’s trading business is heavily influenced by connections we make on social networks.  I intend to grow another brain or two.

 

3. Find a new trade set-up.  My current strategy is going well but you can never get complacent in this business.  Always look for opportunities.  I am currently working on an option strategy that I think holds great promise.  Even better, I will establish processes to find new trade set-ups.

 

4. Learn something new in finance, or brush up on what I learned in school about fixed income, currencies or some other product.  Then mash up what I learned with what I am doing now.

 

5. Write everything down as blogs that elevate both writer and reader.

 

6. Help our trading partnership build amazing trading tools for our SpreadTraderPro Community.

 

I will monitor my progress by how well my trading platform grows throughout the year.

 

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