Seeking Alpha

Gary Cheng

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  • Consider This Arbitrage Strategy As The Market Moves Sideways Or Into Correction [View article]
    Hi Baboon, thank you for your comments.

    Regular margin requirements for stocks apply or they could be 100% paid for on the long side and fully cash secured on the short side.

    If the market declines a fair amount, buying PBP would likely outperform the SPY but will still result in a loss. That is why we need to add a short component to turn it into positive return.
    Jun 17 04:35 AM | Likes Like |Link to Comment
  • Consider This Arbitrage Strategy As The Market Moves Sideways Or Into Correction [View article]
    Hi Blix, thank you for your comments.

    An arbitrage, in the broader sense of its meaning, involves the buying and selling of one security itself and in its various forms or buying/selling two different securities that are highly correlated. The security is the SPY and the PBP could be considered as another form of SPY (a SPY overlayed with option) or another securities that is highly correlated to SPY. So, a long/short pair of the two will give you some sort of payoff which could be approximated by the amount of premium received from continuous selling of monthly SPY calls.

    An arbitrage trade is not necessarily risk-free; they are generally high probability trades but could still sustain fair amount of losses if the original investment thesis goes wrong. For example, merger and acquisition arbitrage can go very wrong if the deal doesn't fall through.

    An inverse ETF like SH is a good short term trading vehicle when there is a definite trend in place and for investors who can not short in their accounts. SH is only 1x inverse so there is not much value "decay" in a sideway market as compared to the 2x or 3x inverse funds. These characteristics make SH a suitable short SPY substitute in my alternative strategy.

    There are pro and cons of using inverse ETF and buywrite ETFs on their own but that's not as relevant in my suggested pair trade strategy because one "long" is hedged by a "short" side.
    Jun 17 04:18 AM | Likes Like |Link to Comment