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/-
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/-
