Stock Market Symbols
Playing The Long Stock/Short ETF Hedge… by Shiraz Lakhi
Playing The Long Stock/Short ETF Pairs Trading Strategy:
An Advanced Trading Strategy For Speculating On Fundamentally Robust Growth Stocks, With Limited ‘Broad Market Risk’ – By Shiraz Lakhi, Self Directed Trader/Publisher…
With the multitude of financial sites touting the next “double-digit growth stock”, the most compelling, well-researched stock trading ideas remain plentiful. For many investors however, finding stocks to trade is the easy part. Pulling the trigger… well… not so easy…
This is because, no matter how positive the fundamentals or technical analyses exhibited in a particular stock – no matter how temporarily undervalued the stock appears relative to it’s peers – there always exists the risk of negative broader market sentiment which can potentially wipe out any short-term profit. Like it or not, the major indexes & sector trends drive the demand/supply in the majority of individual stocks.
So, how do traders go about taking a long position in a stock, while ensuring they are not overly exposed to a sudden reversal in the broader market…
In order to mitigate some of this risk, there is a trading strategy investors can learn, to ‘hedge’ any long stock position entered, by simultaneously shorting an ‘equal dollar value’ position in the stocks ’sector ETF’. This market neutral trading strategy, better known as ‘pairs trading’, significantly counters the broader market risk…
For instance, using this strategy if you are entering a new $64,000 long position in Google, then you would simultaneously short $64,000 in XLK (the technology sector Exchange Traded Fund, or ETF).
The thinking process and objective behind this (intelligent speculation if you like), is that Google is expected to outperform it’s respective sector…
The key point to grasp: With pairs trading, market direction is of no significance. The pairs traders only objective is to determine whether the selected long stock will do ‘better’ than the shorted sector ETF.
Based on this strategy, in my own trading, I tend to ‘group’ a continually monitored list of around 40-50 stocks (my fundamentally strong watch list). These consist of businesses exhibiting competent management, innovative product line, proven year on year growth, low debt ratio, and backed up by a strong, upward technical trend ‘relative’ to it’s industry sector.
Examples include Google, Apple, HP, as well as stocks within energy, alternative energy, consumer staples, basic materials operatives in Asia, REIT’s (Real Estate Investment Trusts), and so on…
For each stock within my watch-list, I continually keep track of what is known as the stock/ETF “ratio” chart…
The ratio chart is a simple day-to-day plot of the stock price ‘divided’ by the sector ETF price. The result (ratio) can then be viewed from the perspective of a trend trading approach. A continually rising ratio chart (as shown in the AAPL/XLK example below) indicates that the stock has proven to continually ‘outperform’ it’s industry sector…
View Image: dowtrader.net/AAPL-XLK-TRADE.gif
To add structure to the underlying trend, I have also plotted an equilibrium trend line (blue line) which cuts through the 12 month ratio chart.
In addition, there is also a simple 14 day moving average (in red) of the ratio overlaid on to the same chart.
The equilibrium trend line gives me a ‘mirror’ around which the ratio oscillates. It also indicates the ‘degree’ of overvalue/undervalue…
Whenever the ratio drops below a ‘rising’ equilibrium trend line (blue line), and drops below it’s 14 day moving average (red line), without any major fundamental shift (the stock remains fundamentally strong), I wait for the ratio to reverse back up…
On the ratio reversing back up (from falling to rising), I wager on the stock climbing back up towards the equilibrium trend line. To capitalize on this speculation, I enter a new ‘long’ position in the stock, and at the same time, enter a ’short’ position in the sector ETF, in equal dollar value. If the ETF cannot be shorted (on occasion), I short the next best ETF, the closely correlated S&P 500 index ETF, (symbol: SPY).
This long stock/short ETF, dollar-neutral trading strategy is more popularly recognized by hedge traders as stock/ETF pairs trading…
In this example, I am entering ‘long’ a stock I deem to be fundamentally solid, but ‘temporarily’ undervalued, and simultaneously hedging this position by entering ’short’, the sector ETF, in equal dollar value, providing some downside protection, in case I am wrong…
By going long the stock and simultaneously short the sector ETF, a pairs trader endeavors to hedge against the overall, broader market risk (in case the currently robust market/trend reverses)…
In this instance, if I am long AAPL/short XLK, and a significant overnight event causes the tech sector (or the entire stock market), to re-open sharply lower, the profit on my short position would, more or less, generally counter-balance any loss on the long stock position.
My daily trading/research focuses primarily on the above strategy. Each day, and at frequent intervals throughout the day, I keep an eye on my core list of 40 or so ‘fundamentally robust’ stocks, plotted against the sector ETF (ratio chart). I look to identify when any one stock/ETF ratio, drops below both the equilibrium (blue line) and below the MA (red line), and then turns back up (a ‘ratio reversal’, usually confirmed around an hour before the closing bell)…
At this point, I check the news-flow to ensure there is no significant ‘event’ (such as adverse earnings report, or change in stewardship), which could make the undervalue potentially long term…
On clearance of this diligence, I enter the hedged pair trade position, going long the stock and short the relevant sector ETF. On the ratio returning back above equilibrium, I liquidate (exit) the entire position.
You can follow my trade ideas (purely speculative – I am human, prone to mistakes, but continually learning & adapting), posted live at stocktwits.com/tradepilot
Wishing you every success in your trading, and good spirit…
Shiraz Lakhi
Self Directed Trader/Publisher
Web page: http://www.dowtrader.net/ShirazLakhi.htm
About the Author
Shiraz Lakhi – Self Directed Trader, Actively Seeking Out Temporarily Undervalued, Fundamentally Solid Growth Stocks – View Full Free Cash Flow Yield Strategy Here. View Shiraz Lakhi’s Daily Trading Blog Here – Real-Time Trading Ideas Based On Free-Cash-Flow Yield Strategy. View Shiraz Lakhi’s LinkedIn Groups Here.
Stock Market Tips & Facts : What Is a Stock Symbol?
|
|
Wallmonkeys Peel and Stick Wall Decals – Lay Figure Sitting on Rand Symbol – Removable Graphic WallMonkeys wall graphics are printed on the highest quality re-positionable, self-adhesive fabric paper. Each order is printed in-house and on-demand. WallMonkeys uses premium materials & state-of-the-art production technologies. Our white fabric material is superior to vinyl decals. You can literally see and feel the difference. Our wall graphics apply in minutes and won’t damage your paint or l… |
|
|
Wallmonkeys Peel and Stick Wall Decals – Börsen Symbol Bulle Und Bär – Removable Graphic WallMonkeys wall graphics are printed on the highest quality re-positionable, self-adhesive fabric paper. Each order is printed in-house and on-demand. WallMonkeys uses premium materials & state-of-the-art production technologies. Our white fabric material is superior to vinyl decals. You can literally see and feel the difference. Our wall graphics apply in minutes and won’t damage your paint or l… |
|
|
Fortune Street – Nintendo Wii $45.00 Players become familiar characters from the Nintendo and DRAGON QUEST universes in a board game that challenges you to play the real estate and stock markets wisely to win. Race around the board trying to accumulate wealth and hit a target value while buying, selling and trading property with friends and family to see who can be the first to cash out. What appears at first to be a simple property-… |
|
|
Nuts! Southwest Airlines’ Crazy Recipe for Business and Personal Success $3.47 Twenty-five years ago, Herb Kelleher reinvented air travel when he founded Southwest Airlines, where the planes are painted like killer whales, a typical company maxim is “Hire people with a sense of humor,” and in-flight meals are never served–just sixty million bags of peanuts a year. By sidestepping “reengineering,” “total quality management,” and other management philosophies and employing it… |
|
|
Stock Market, including: Fundamental Analysis, Insider Trading, Stock Exchange, Security (finance), Stock Market Bubble, Initial Public Offering, … Ticker Symbol, Nifty Fifty, Stock Broker $36.32 Please note that the content of this book primarily consists of articles available from Wikipedia or other free sources online. Hephaestus Books represents a new publishing paradigm, allowing disparate content sources to be curated into cohesive, relevant, and informative books. To date, this content has been curated from Wikipedia articles and images under Creative Commons licensing, although … |
