The Unwinding of a Pair Trade From Down Under

Includes: EWA, IAF
by: Elias Tsepouridis

"I love it when a plan comes together," as Hannibal frequently said on the A-Team….

It only took 2 trading days for my pair trade goal, for Aberdeen Australia Equity Fund, Inc. (NYSEMKT:IAF) and Shares MSCI Australia Index (NYSEARCA:EWA), to be met with a 72% annualized return before taxes.

A Perfect Pair Trade from Down Under

As expected, the price ratio fell within my goal on the ex-dividend date of IAF. Looking at the last 30 days of price ratio, you will notice the significant drop, similar to the previous quarterly dividend payment of IAF. The new price now falls below the 5 and 10 day moving average, along with falling in between the 2nd and 3rd quartile of the last years trading averages.

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PAir Trade

I was able to capture a net profit of $144 in 2 days, not including taxes. This results in a 72% annual percentage increase on my $25,000 investment, using a 250-day year. My profit before fees was $458 less $[40] for commissions and $[274)] for dividend payments. You can improve this return by minimizing you per trade commission rates. I am using E*Trade as the basis. I have been recently informed that Bank of America will not charge you trading fees if you open an account of $25,000 or more, this would improve my return to 92%. Something to think about if you will be active with pair trades.....

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Opening and Closing Transactions