Apple versus Amazon.com

I just wanted to share with you that one of our traders has done very well trading the $AAPL versus $AMZN spread. These two companies don't leave traders indifferent as to their respective valuation, momentum, technical analysis, and management. We have our own opinion as well about how to trade these two stocks against one another on a short time scale. We add statistical methods to the traditional toolkit. The additional information is very helpful in the pursuit of trading profit.

The image below displays the relationship between $AAPL and 2* $AMZN. On a five year time scale the spread exhibits strong mean reversion.  

We have web enabled our spread analyzer. What that means for you is you can use our spread analyzer tool for free right here.  You can use the tool to analyze how the $AAPL $AMZN behaves at different time scale. You can also use the spread analyzer to analyze a combination of stocks of your own choosing. The analyzer will not work with Internet Explorer (IE) because of how Microsoft handles security within IE. This will be resolved shortly. The tool works fine in Chrome.  You can download Chrome right here.

Go out for a spin and let me know what you think!

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

   

Small and Large Cap Stock Brawl

At Bigger Capital we like to trade the $SPY- $IWM spread. In addition to being a great spread to trade for profit, this spread measures to a certain degree the amount of risk being added or taken out of the market. The spread movement indicates the state of the money flow between small cap and large cap stocks.

The behavior of the spread was particularly interesting in September. This is what we have noticed, and this is how we have used our own interpretation to trade the market:

• The spread increased in value overall throughout the month indicating risk being taken out of the system (trend line).
• Despite the increase in the value of the spread, $SPY rallied last week. We took this opportunity to initiate a short position.
• Notice the sharp spike up in the spread on September 2nd, followed by a sharp drop in $SPY on September 3rd.
• On September 22nd, the spread had a strong move downward indicating that someone might be willing to take more risk out there (could be an aberration). On September 22nd, we traded from a long bias in the afternoon and made good money on that basis.
• Could the spike indicate a rally coming ahead? Maybe or maybe not, but I am looking to short the market aggressively if the spread spikes back up. If the spread continues declining and the spread hold its own we will be active from a long perspective (small size) with a very short term horizon (a few hours).

 

 

Does this sound like a good game plan?

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

Big News Creates a Big opportunity

Check out the trade we did at 8:30 am last Friday as the employment data news hit the tape.

We bought the spread 8 * $SPY – 13 * $IWM at a level of $33.94 which was about $10 below the level it was trading just before the release. I am talking about a fraction of a second.

Our ability to make money in this situation depended on the following three components:

• Major news that can move the market big time.
• Fast technology to capture a very short term liquidity gap that was almost invisible to the naked eye. Fast computers are great. Embrace them.
• The appropriate low delta spread. You wouldn’t want to trade this with an open delta.

We wish we could have done more of this but it was just too fast.

Have you ever taken advantage of a situation like this one?

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

Halliburton Rockwood Spread

  Yesterday we bought the spread $HAL-$ROC as part of our statistical strategy.  We thought we’d give a brief description of the main statistics we looked at before implementing this trade.

1. The $HAL-$ROC spread is cointegrated with at least a 90% confidence interval over both short term and long term time periods.
2. The spread is just over 2 standard deviations from the mean for the periods we look at.
3. The half life of the spread is under 50 days.  We don’t like to hold positions for long periods.
4. By just looking at the graph you can see that the spread didn’t make a significant gap to get to the entry point.  We worry when we see a big gap because it might indicate a change in the relationship.

Written by Norm Winer. Follow me on Twitter and StockTwits.
hal roc 8 29 2011

How I Use Spreads in Volatile Markets

The volatility in the markets this month has reinforced for us the huge value of trading spreads.  With spreads, you are betting on relative performance rather than on absolute performance.  This means you can express a view without taking on unwanted risk.  When the markets are moving with 10 to 15% volatility, market risk is minimal.  However, when the $VIX is at 40, eliminating unwanted risk is so important.

As an example, we bought $TGT the morning of August 17 when it reported good earnings.  To hedge out market and sector risk, we sold an equal amount of $XRT the Retailers ETF.  Here is the chart of $TGT over the two days August 17 to 18:

As you can see, $TGT traded down during August 17 and opened lower the morning of August 18.  However, the index traded down more over the two day period, so our trade was profitable.  Here is the chart of the spread $TGT-$XRT over the same 2-day period.  We bought the spread at 4.3 and sold it at 6.2:

This is a very different picture, isn't it?

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

5 Things We've Learned about Spread Trading

• Avoid Spreads Which Have Recently Gapped – Sometimes a spread will meet your criteria because it gapped.  Be careful of these.  It may indicate the spread relationship is broken.

• Your Target Profit and Stop Loss Should Be Symmetric – If you are right more often than not you will make money.

• Time Limit – Set a time limit for how long you hold a spread, ideally not too far away from the half-life.  There is a risk and opportunity cost to holding positions too long.

• Know How You Made or Lost Money – Are you making more from your shorts or longs?  Is there a catalyst involved or are the spreads just drifting back to the mean?

• Track the Spreads after You’ve Unwound Them – Are you unwinding too early or too late?

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

Stop-Loss in a 40 Vol Market

When setting up a long position with a stop-loss and a target profit level, the trader is basically long volatility above the entry price and short volatility below it (short convexity and skew). In a market drifting down and moving at 40 vol, this strategy has no chance. It is short vol at the wrong spot.  Instead of using stop-losses to reduce risk, we hedge our positions using spreads.  Everything is relative to something else, and we take risks only when we can exploit a liquidity gap.

Anyone having a good experience with stop-loss strategies in this environment?

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

$GLD – $GDX Not Too Late to Short

Okay we are going to talk our book this week. The $GLD-$GDX (Gold Miners ETF – Gold ETF) spread, which we sold on July 7th, continued its steady decline. We sold this one based on our macro view. In May and June many traders seemed to think that the Fed’s easy money policy was close to ending. This was reflected more in the price of $GDX than $GLD, $GDX being the more speculative way to bet on gold prices. Also, a stock market sell-off in early June didn’t help the mining stocks. Well it appears sentiment has changed and mining stocks are moving higher again. $GDX is up 11% month to date. In spite of this impressive move we believe it’s not too late to enter this trade. It’s not unreasonable to think this spread could return to levels last seen in March. For now we are holding our position.

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

Thoughts on Bracket Asymmetry

• bracket asymmetry does not change the expected reward of a trade, it only changes the frequency of your wins & losses. In a random process a symmetric bracket will produce 50/50 loss/win with equal amounts. Asymmetric bracket 80/20 will give you wins 80% of the time and losses the other 20%, but your average loss will be 4x larger than your average win, giving you the same expected reward of 0.
• At this moment I keep brackets symmetric to reduce complexity.
• bracket width is very important: set it too low and you only get 'market noise', set it too high and neither level will be hit. I generally use a vol estimation to adjust for bracket width.

Written by Jev Kuznetsov. Jev is a physicist who trades and develops trading algorithms.

 

Cockroach Theory Applied to SuperValu (Update)

Supervalu ($SVU) is a company that we have been following since its most recent earnings release on April 14.  The stock has performed poorly in recent years.  On April 14 the company announced earnings of $0.44 compared to consensus estimate of $0.34.  The stock opened up 12%.  Since then, the stock continued to rally for a few weeks before declining back to below the post-earnings level.  It has rallied slightly from the lows of last week:

$SVU is scheduled to release earnings on July 26.  Consensus estimate is $0.33 per share, significantly below last quarter actual $0.44.  We think there is value in Supervalu ahead of this earnings release.

Yesterday competitor $WINN was up almost 20% on an analyst upgrade, citing stronger-than-expected consumer demand.   The Cockroach Theory states that whenever you see a roach there are usually more hiding.  In this case the news and stock price reaction in $WINN is the visible roach, and we think $SVU is hiding a roach (good news) as well.

The chart below shows $SVU in blue compared to $WINN in red and $KR in green.  As you can see, $SVU has declined significantly compared to its peers since the weeks following its last earnings release.   It has started to tick higher, but we think it has more room to run ahead of July 26 earnings:

$SVU has a new management team focused on cutting costs and branding.  Consumers are still budget-conscious, to the benefit of low-cost grocery stores such as $SVU.  That said, there are risks to our bullish view.  Grocery retailing is a competitive business.  $SVU still struggles to draw customer loyalty to its brand, and big chains like $WMT and $TGT continue to expand grocery product offerings.  $SVU faces an uphill battle against these competitors and a headwind of high unemployment and fears about the economy.

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