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The Powerful Edge of Market Neutral Equity Pairs

The Powerful Edge of Market Neutral Equity Pairs. www. Pair Trader.com. Presented by: Don Bright. What is a Pair?. The combination of two stocks to profit from their relative change in price through divergence or convergence of the spread price. Statistical Arbitrage vs. Risk Arbitrage

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The Powerful Edge of Market Neutral Equity Pairs

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  1. The Powerful Edge of Market Neutral Equity Pairs www.PairTrader.com Presented by: Don Bright

  2. What is a Pair? • The combination of two stocks to profit from their relative change in price through divergence or convergence of the spread price. • Statistical Arbitrage vs. Risk Arbitrage • Created for different purposes traded with many different strategies

  3. Creating a Spread Price to Watch • Example: Long Alcan vs. Short Alcoa • Differential • Last Price of AL minus Last Price of AA 48.06 – 30.58 = 17.48 • Factor • (.65 x AL) – AA (.65 x 48.06) – 30.58 = .66 • Ratio • Numerator and Denominator • AA divided by AL 30.58 / 48.06 = .64

  4. Trading Considerations • Goal is Market Neutral • Choices are: • Dollar Neutral ($1 long to $1 short) • Beta Neutral (H.V is substitute) • Share Neutral

  5. Best Pairs Created From: • Same Industry Group • Correlated • Exhibit Mean Reverting Tendencies Why is there the probability of mean reversion over time? • Fundamental Difference Between Stocks Comparing Metrics is Straightforward • Overvalued / Undervalued to Peers

  6. CnpSrp100 65-Day Chart

  7. Metrics used in Fundamental Comparisons Value out performs growth when risk adjusted Compare: Market Cap Price to Book (P/B) Tangible Book Values Price to Earnings (P/E use TTM) Dividend Yield Industry Group Short the overvalued stock Buy the undervalued stock

  8. Spread History

  9. Compoundable Trades • Predictability • Intra-day Scalps • Market Neutral Swing Trade • Relative Strength Pairs • Baskets • Pair Investing • Fundamental Edge • Technical Edge

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