Pair Trading - Exploring The Low Risk Statistical Arbitrage Trading Concepts

[nurav]

This is the Banknifty-Nifty spread in the ratio of 1:1.5(say 2:3). It delivered around 650 points per pair (26000) with limited drawdown. The initial risk to this position was around 100 points (about Rs.4000). which was also the maximum risk. If you consider the 2 adds the profits would have been close to 1500 points (60000 rupees) in 3 pairs.

 

[ncube]

I had posted these charts just to illustrate the profit potential with relative safety(because we are short one instrument and long in another) so even if the markets were to crash, there would be limited losses if not huge profits.
Very Nice initiative Ncube Sir.

The method you have shared is one way of trading pairs but it is not statistical arbitrage trading, hence the 2 stocks are not fully hedged. One should be careful and maintain proper risk management as the risk is proportional to the spread one is trading and will have similar risks as trading individual stocks.

 

[nurav]

Yes you are right sir. Sorry for messing up your thread.

 

[nurav]

The reason i chose stocks from the same sector is to shield from bad news to the sector. We are actually going long on the outperformer within the sector and shorting the laggard and are relatively immune to extraneous factors like overnight policy change etc.. only affecting one sector.

 

[nurav]

If you use good MM and are relatively sure about the trend then can also employ these kind of spreads which have inbuilt hedge. This is Short 26500CE and long 5 26700CE. 2 relatively safe signals of the day gave around 800+ points. The Initial risk which was also the maximum risk was 50 points. Position may or may not be squared off at 3:25 to lock in profits. (now 50 points risk is quite acceptable in Bank Nifty). 50 points mean Rs.2000 and 800 points mean Rs32000. A RR of 1:16.

 

[VJAY]

View attachment 27140

If you use good MM and are relatively sure about the trend then can also employ these kind of spreads which have inbuilt hedge. This is Short 26500CE and long 5 26700CE. 2 relatively safe signals of the day gave around 800+ points. The Initial risk which was also the maximum risk was 50 points. Position may or may not be squared off at 3:25 to lock in profits. (now 50 points risk is quite acceptable in Bank Nifty). 50 points mean Rs.2000 and 800 points mean Rs32000. A RR of 1:16.

Dear nurav,
Whats this code ?is it shared in tj or anywhere?how you plotted both scrips in ami?

 

[nurav]

Vjay sir the Code is customised and provided to me by Varun sir. I do not have his permission to divulge the code. I hope you understand. I had posted these charts just as food for thought to highlight the power and potential of spread trading in the appropriate thread. To carry the discussion forward on my last chart, the price of 27700CE was 98 or say 100. It would not have come to zero on that day only as it was the 1st day of expiry. So even if one did not take profits his maximum risk till expiry would be around 500 points, provided Bank Nifty Futures closed at 27700 or lower on expiry. Though i would always advise to book out on profits at the end of the day as Options decay fast.

 

[VJAY]

Vjay sir the Code is customised and provided to me by Varun sir. I do not have his permission to divulge the code. I hope you understand. I had posted these charts just as food for thought to highlight the power and potential of spread trading in the appropriate thread. To carry the discussion forward on my last chart, the price of 27700CE was 98 or say 100. It would not have come to zero on that day only as it was the 1st day of expiry. So even if one did not take profits his maximum risk till expiry would be around 500 points, provided Bank Nifty Futures closed at 27700 or lower on expiry. Though i would always advise to book out on profits at the end of the day as Options decay fast.

No problem I can understand...

 

[PUCHU_2500]

VJAY,
I think nurav=varun,

 

[ncube]

View attachment 27140

If you use good MM and are relatively sure about the trend then can also employ these kind of spreads which have inbuilt hedge. This is Short 26500CE and long 5 26700CE. 2 relatively safe signals of the day gave around 800+ points. The Initial risk which was also the maximum risk was 50 points. Position may or may not be squared off at 3:25 to lock in profits. (now 50 points risk is quite acceptable in Bank Nifty). 50 points mean Rs.2000 and 800 points mean Rs32000. A RR of 1:16.

@nurav, based on the excitement you have shown in calculating the profit and loss, I can easily presume that you are new to trading. I dont want to discourage you, but if it can help you avoid blowing up couple of trading accounts I will be happy and you will be thankful to me later..

For all new traders it is very important to understand the following points:
1. There is no easy money in trading.
2. Rewards are directly proportional to Risk.
3. If any strategy seems too good, it unsually isnt.
4. If someone says he has a strategy which gives high rewards with low risk, its a red flag..run away from him as far as possible it is clear that the person has not traded the strategy enough.
5. Success in trading requires hard-work, discipline,confidence and patience to stick to 1 or atmost 2 strategies and not hopping systems. A given strategy may not work in all situations but if you keep hopping systems then you can never master any strategy.

Now coming to the Banknifty Option spread trade example you have mentioned, it is not a low risk strategy, in this you are buying out of money call options and sponsoring it with ATM/ITM call options.There is no clear rationale for doing this, one reason to take this trade could be that one is super bullish on BANKNIFTY as this trade will start making profit only when the price moves above 27900, if the price stays below 27500, then you can lose a max amt of 200-Credit from Short 27500 + 4 * debit from Long 27700. There are much better option strategies one can apply to trade bullish opinions, even a simple ATM call option buy trade can give you a better returns. Trading option are more complex than trading stocks, hence always try to plot the strategy pay-off diagram first to understand the risks before placing the option trades.