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Options Application in Pairs Trading
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Dennis V. Leontyev, President and Hedge Fund Manager,
Milangy Management Co., LLC; Options Strategist and Editor,
Hamzei Analytics Options Trading Service (HOTS)
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An exploration of one particular market-neutral strategy that has not been widely publicized, but has endured for years as a successful approach used by many institutional money managers and hedge fund experts, is the focus of this article. The strategy is called pairs trading. In simple terms, pairs trading consists of buying one stock in an industry and selling short another stock (with which it has been paired via standards to be explained later), usually in the same industry. This approach has become something of a lost, or rare, skill, but, currently, it is resurfacing in the mainstream.
Pairs trading is a non-directional, relative value investment strategy that seeks to identify two companies with similar characteristics whose equity securities are currently trading at a price relationship that is out of their historical trading range. This investment strategy entails buying the undervalued security, while short selling the overvalued security, thereby maintaining market neutrality.
This definition lays out three main areas of focus that play out as subtexts to the overall idea of pairs trading and must be considered and understood before the unified strategy will make sense: Market neutrality, relative value or statistical arbitrage and technical analysis.
Click here to read entire article.
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"An exploration of one particular market-neutral strategy that has not been widely publicized ...is the focus of this article. The strategy is called pairs trading. In simple terms, pairs trading consists of buying one stock in an industry…" |
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