Q&A | FEB 2010
Q&A by Don Bright
Q&A by Don Bright SHORTING A SPREAD/PAIR Don, could you explain what it means to short a spread/pair? If a spread X-Y (where X is the long position and Y is the short position) is determined to be overbought and due for a pullback, the spread could be “shorted” by selling X and buying Y. To me this means that you reduce the number of shares of X (sell) and you buy to cover Y (since you are short). If you do this, then one action would cancel the other out, so what would be the benefit? How should this be done properly? Thanks. —dvaneyl5 To short a spread pair is just a definition. If I short a $32 stock and buy a $30, I have effectively shorted the spread pair for $2.00. Some consider it as buying for a ($2.00) — depends on whether you’re an old option spread trader like me. Obviously, if you buy the $32 stock and short the $30 stock, you have “bought” the spread. Now let’s get back to the basics of spread/pairs trading. We track hundreds of correlated pairs on a daily basis. We keep track of many variables, one of the most important of which is the six-month trading range. For example, let’s use that $32/$30 pair of X and Y. Now, by using a simple six-month price graph, we see that the pair has crossed the $2.00 line several times. It has a high differential of $6.00 and a low differential of $1.00 during this time frame. We look at all the fundamentals as well. We tend to run various time frames, determining how much the spread moves on a daily basis (so we know how much to expect from our intraday/intraweek trades).
by Don Bright
Technical Analysis of STOCKS & COMMODITIES
The Traders’ Magazine since 1982
has had over 1,226,237 subscribers from 174 different countries.
37,000 Page Traders’ Archive for $89.99
To continue reading, sign-up for trial access to Traders.com and the S&C Archive — 37,000 pages of trading ideas!
After verifying your email address, you will have limited access to the S&C Archive, as well as access to a Digital Edition of S&C, and access to Traders.com Advantage and Working Money for 30 days.
Not a subscriber to Technical Analysis of
STOCKS & COMMODITIES magazine?
Click
here to subscribe, or request
a trial subscription.
Log-in now to view articles from the S&C Archive.
Your Subscriber ID is located at the top of your magazine label, highlighted here in red.
Your last name can be found on the second line, highlighted here in blue.
*If you have a company name on the label, that can also be used. It will appear below your name on the label.
If you do not have a Subscriber ID on your label, you can find it on your statement or renewal form.
For help locating your Subscriber ID number, please call us at 1-800-832-4642 or send an email to Survey@Traders.com. If sending an email, please include your name and mailing address.