SELL 1 lot ICICIBANK & BUY 1 lot PNB ( aug series) at differance of Rs.160

HLL & ITC

Keep watch on HLL & ITC ( AUG Expiry)

Short 1 lot HLL & Long 2 lot ITC at price ratio of 1.900.

HDFC BANK & KOTAK BANK

Sell 1 lot HDFC BANK & Buy 1 lot Kotak Bank at difference of Rs. 27 ( current difference is 23.15)

correlation vs cointegration

Cointegration is the foundation upon which pair trading (“statistical arbitrage”) is built. If two stocks simply move in a correlated manner, there may never be any widening of the spread. Without a temporary widening of the spread in either direction, there is no opportunity to short (or buy) the spread, and no reason to expect the spread to revert to the mean either.

What is the difference between correlation and cointegration? If  A and B were really correlated, when A goes up one day, B would likely go up also on the same day, and vice versa. Their daily (or weekly, or monthly) returns would have risen or fallen in synchrony. But that’s not what my analysis was about. I claim that A and B are cointegrated, meaning that the two price series cannot wander off in opposite directions for very long without coming back to a mean distance eventually. But it doesn’t mean that on a daily basis the two prices have to move in synchrony at all

Now consider stock A and stock C.

Stock C clearly doesn’t move in any correlated fashion with stock A: some days they move in same direction, other days opposite. Most days stock C doesn’t move at all! But notice that the spread in stock prices between C and A always return to about $1 after a while. This is a manifestation of cointegration between A and C. In this instance, a profitable trade would be to buy A and short C at around day 10, then exit both positions at around day 19. Another profitable trade would be to buy C and short A at around day 31, then closing out the positions around day 40.

Theoretically, cointegration is time-scale independent. So we cannot say a pair of stocks are cointegrated on a time scale of years, but not minutes. However, it is meaningful to ask what the average mean-reversion time is.

PNB & UNION BANK OF INDIA ( PAIR)

SELL PNB 1 LOT(828.8) & BUY UBI 1 LOT (192.8) at current price ratio 4.299

SL 4.450

TGT 4.125 ,3.970

HCL TECH & WIPRO PAIR

buy 1 lot WIPRO &  sell 1 lot HCL TECH  at current price difference 124 

TGT Price difference is 100 

TATA MOTOR & M&M

BUY 1 lot tata motor & 400 shares in cash & Sell 1 lot M&M

Cirrent price ratio is 0.341 (222.75/652.70)

Tgt Profit Rs. 10000/-

 

Axis Bank & Bank India ( pair trading)

Buy 1 lot Axis Bank & 90 share in cash And Sell 1 lot Bank India at price ratio of  2.866( 943.55/329.85)


Tgt ratio is 2.950 & 3.000

Pairs trading

Pairs trading or Statistical Arbitrage is a stock trading strategy that attempts to be market neutral and capture the spread between two correlated stocks as they return to the mean price. It is known by some as "statistical arbitrage", but "pairs trading" is the more common name used to refer to this technique.

Simply stated, it is the buying and simultaneous selling of two stocks that follow each other when they diverge from the normal pattern; in the expectation that the normal pattern will soon resume. In other words, traders find two stocks that tend to move together. The trader would buy Stock A and sell Stock B short.

Pair trading is also done with options, futures, and baskets of stocks but that is fodder for future articles. This article will cover the basics of pairs trading by showing you a simple 4-step method for pairs trading. I'll also provide examples and point you in the right direction for more information on this highly effective stock trading tactic often used by trading professionals.


STATE BANK OF INDIA & PUNJAB NATIONAL BANK  are two correlated stock.


and currently we can buy PNB & Short SBIN at cmp on rupee neutral basis.( approx 2 lot sbi & 3 lot pnb )


lets see what ll happen to this trade with in 2 days. 

when we entered in trade price ratio is 2.804( SBI / PNB,2101.30/749.30)

Today our trade is in loss as price ratio reached to 2.830(2120.15/749.30).

Now probability is very high that tomorrow it ll give give good profit to us.


on expiry trade ends at price ratio of 2.721( on closing basis)at this ratio profit is more then Rs.15000/-

On intraday basis it gives a maximum profit of more then 22000/-