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

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Presentation transcript:

The Powerful Edge of Market Neutral Equity Pairs 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 Created for different purposes traded with many different strategies

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

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

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

CnpSrp Day Chart

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

Spread History

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

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