Kroger Versus S&P Spread

Some of my favorite scans we provide to our SpreadTraderPro members are statistical runs on ETFs vs stocks. On May 2, Kroger caught my attention as it was cheap statistically versus $SPY.  The spread SPY-KR was trading near the high of the range, with a zscore of +1.6: 

SPY KR Spread

The momentum though was clearly favoring $KR to weaken further against the major index so I decided to wait to sell the spread.  I set an alert at a level of +$5 using the "My Alerts" tab. On June 13, the alert triggered when the spread traded above 5 and I sold a small quantity at $5.04. 

On June 14, the company increased its earning forecast for fiscal year 2012. The spread dropped to -2 on the news and then rebounded to $1 and I sold more at that level. 

This is a spread I will sell more of at any opportunity as it moves back toward its average with the current catalyst.

The trick here is to combine value and a catalyst that will propel the spread to a more normal level. The catalyst is critical to put an end to the momentum that pushed the spread in the overvalued category in the first place.

Where do you see pockets of value on a relative basis? Have you thought about running a statistical test on your stocks versus major indices using our Spread Analyzer?

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

Canon Value Play

Yesterday, we sold the 2 * SPY - 5 * CAJ at 66.78. Here is a short video explaining why we did it.

How to Rate Spreads

For traders of equity spreads, one of the biggest challenges is finding quality spreads to trade.  In our webinars, one of the most common questions is how to find good spreads.  

Of course, one way to find good spreads is to sort your SpreadTraderPro daily scan by the characteristics that you find most interesting.  But this can be time-consuming.  That is why we are developing a database of highly rated spreads.  

Here is how it works:

-you rate 10 spreads per month (instructional video below)

-we compile the data and sort it

-you will be able to see the highest rated spreads

It is pretty simple.  It is the next wave of technology to help spread traders make more money.  And it is coming soon.  So get started rating spreads today!

 

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

How to Build a Spread Trading Playbook

In this video, Jennifer also reveals how I trade my Favorite Spread: 8 * $SPY - 13 * $IWM.

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Migrating to the Cloud

Fred Wilson wrote a great post about moving from Skype to Google Hangouts. You can read his post here.

What really caught my attention in this post was the following statement:

But my decision last year to leave the world of files and apps and get to the cloud has been incredibly liberating

That statement resonates with me because I find it liberating to run web enabled applications. This is the main reason we developed our web-enabled Spread Analyzer. It was a pain in the ass to upgrade our own internal software on each trader's desktop. So we decided to change our approach. It was liberating. Once we enabled our tool, it became obvious to us that other traders could use it as well and the incremental cost to allow others to use it was minimal. So we opened it up with minimal friction, and it opened up all kinds of avenues for us to explore.

Fred Wilson is a very successful investor and his statement speaks to the paradigm shift currently under way in technology. Big money with big stocks will be made on this shift.

I am paying attention. You? 

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

Magical Widget

In a frictionless, costless, and magical world, I would have a magical widget that allows me to interact with financial data in the following fashion.

From any program I could make a call resembling this:

Get (ticker A, market capitalization, source of information) =====> output = accurate theoretical market capitalization for ticker  A

I could use this widget to run algorithms in spreadsheets, program scripts, and so forth.  I could search for companies trading well below (or above) their theoretical market capitalization and make lots of money.

My goal is to find or develop this tool in the real world.

GoogleFinance's structure most closely resembles what I am looking for but the set of attributes is very small. It is a start though, and a window into the future. 

In the meantime, information gatekeeping and speed bumping will continue to be a very good business.

Maybe Amazon.com's Mechanical Turks can be used to bypass the gatekeepers. Perhaps also the Twitter API.

Do you know of any cool financial tools that can get me closer to my goal? Is my magical widget something you would use if it existed?

Would this be something useful?

Get (AAPL, AMZN cointegration 5yrs, Bigger Capital) =====> cointegration of AAPL and AMZN over a 5 year period

Written by Michael Bigger. 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 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