We are doing a webinar tomorrow called "Learn to Trade Like a Math Geek". It will be at 4:30pm eastern daylight time. We will discuss the mathematical side of statistical arbitrage trading in a very practical way, no knowledge of statistics assumed. Please click here to register.
My main trading strategy is long/short equity pairs based on statistical methods so our web based Spread Analyzer is an essential tool for me. But even if your strategy is not based on statistical relationships our Spread Analyzer can also add value.
In addition to my long/short strategy I also trade options, and I’ve recently gotten in the habit of using our Spread Analyzer for that strategy too. The strategy involves buying cheap volatility so there is no direct connection to statistical arbitrage. Yet I find it’s useful to see how over or under valued a stock may be relative to the market or its peers, and how strong that statistical relationship is. For example, if I think volatility is beginning to look cheap in a particular stock but I can’t decide whether to buy or wait, I’ll run the stock through the Analyzer against the market or its peers. If the stock looks expensive (with a strong statistical relationship) I will probably buy volatility. If it looks cheap I might decide to wait.
Whatever your strategy, there are probably dozens of ways the Spread Analyzer can be a useful tool. It only takes a few seconds. Try it and let me know what you think.
Written by Norm Winer. Follow me on Twitter and StockTwits.
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.
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.
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.
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.
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.
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.
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.
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
Tuesday, March 13, 2012 at 1:21PM