Home Depot / Lowe’s Pair Trade Beats S&P 500

That was a perfect up and down for the duration of the Home Depot (HD)/Lowe's (LOW) pair trade…about 10 days. To provide you a background, here is my first post on the Home Depot and Lowe’s pair trade that I initiated as of the close on August 31st.

As my first post highlights, the target price ratio for the pair was 0.873 (LOW/HD). On September 10th, the pair closed at a ratio of 0.880; HD at $33.81 and LOW at $29.76, resulting in a 3.6% return after commissions in 10 days. On an APR basis, this trade results in a 131% return, not too bad.

Over the same period, the S&P 500 performed at a –1.5% loss from 1,473.99 to 1,451.70, therefore the pair trade provides alpha on an net basis (after commissions and taxes).

Final Trade details

Opening Trades: Sell Short 261 shares of HD at 9,999 Buy 322 shares of LOW at 10,001

Closing Trades: Buy to Cover 261 shares of HD for 8,824 Sell 322 shares of LOW for 9,583

Total Profit, gross $756 Commissions of ($40) Profit, net of commissions $716

I have attached an updated version of the price ratio chart through September 14th, 2007.

I will continue to look for additional opportunities to initiate this trade again….

Please leave a comment or email me if you have executed this trade successfully.

Author disclosure: I am neither long nor short HD or LOW

Comments

[StatGury]

I always wonder about the motives of people like Elias Tsepouridis. He appears to be too smart to not see holes in his analysis and then I wonder why, if sees holes in his analysis, does he not give the complete picture. So let me warn the readers who might be lured into following his next advice of a similar pair trade. Or even be lured into believing that Elias Tsepouridis is a financial guru. Basically, if two stocks are each selling for $100 a piece and you sell 100 shares of the first and use the proceeds to buy 100 shares of the 2nd. and if you get your grandmother to pay the commission ($20 or so), you will have invested zero dollars so far. Right? Now if the first one sinks to $80 and the second riases to 120, you will make a cool $4000 on a zero dollar investment because you can now sell the second and buy the first and pocket the difference. That is a get very rich very quick scheme. You can even buy Grandma a nice sweater. What is the catch? What happens if the first one rises to $120 and the second sinks to $80. You are in a $4000 hole and next time Grandma will not pay the commission and your broker will chase you out of your house. You got the idea. Now moral of the story: Don't trust Elias Tsepouridis. He is either dumb or dishonest.

[StatGury]

In my previous message I forgot to mention the misleading title that the author has used: "Home Depot / Lowe’s Pair Trade Beats S&P 500". The trade suggested/analysed by him beat the S&P 500 over a 10 day period. Need a say more? Then he has the gall to say "I will continue to look for additional opportunities to initiate this trade again…. Please leave a comment or email me if you have executed this trade successfully.".

I hope no one paid any attention to this guy.

[Elias Tsepouridis]

In my response to the claims of dishonesty....This is not a quick rich scheme...If you have read my previous posts on successful pair trades, you must look for equity pairs that have a high correlation. Regarding the % gain calculation, I feel that I am calculating the % gain appropriately by basing the gain (after commission costs) against my total capital employed ($20,000 in the example). I encourage all my readers to do their own due diligence on every investment.