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Rajeev Seth
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Rajeev Seth is the Managing Director of BeatIndex, an investment management consulting firm. Specializing in quantitative investment management, he has consulted for many diversified asset managers, and startup hedge funds. The philosophy of BeatIndex is that one can indeed beat indexes, by a... More
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Rajeev Seth's Blog
  • Gain arbitrage profits by buying and selling short highly liquid US stocks in the S&P 500 Index 0 comments
    Jul 29, 2010 12:43 AM | about stocks: INTC, BAC, TER, HST, PSA, PHM, DHI, TSS, FISV, MDP, ITT, NDAQ

     Stock Pairs Trader System Description

    BeatIndex’s stock pairs trading system screens for matched stock pairs to go long and short by doing a daily proprietary quantitative analysis of all stocks in the S&P500 Index

    It may find a new entry trading signal consisting of two legs: a buy stock order and a simultaneous sell short stock order on a matching stock in the S&P 500. This computer screening generates an average of one or two paired trades per week. This gives you plenty of time to manually implement the two stock transactions in your brokerage, buying one stock and selling short the other when opening a new pair; or selling one stock and buying back a shorted stock when closing an open pair.

    Our trading signal consists of simple instructions of the kind:

    Buy 1314 shares of TER, while
    SIMULTANEOUSLY selling short 1000 shares of INTC

    You need to implement this trading signal by buying and selling both legs of the matched stock pair. You may execute the paired trading signal within a few hours of the system issuing the signal. It is very important to implement the two stock trades together, preferably on the same day, so as to derive the full benefit of the arbitrage potential in the stock pairing.

    We will also provide you the closing signal on the trade pair, usually within a few weeks. Again, you must get out of the two legs together when your receive our exit signal.

    Since there is plenty of time to implement the two trades, you can go about your business or hobbies without being glued to the financial markets. All you need to be able to do short selling is to open a margin account with your discount stock brokerage.

    Or, to keep things really simple, automatic trading can be done in your brokerage accounts if you choose Autotrade in
    Collective2’s systems. Sign up for your free trial here.

     

    Real example using our very first paired trade

     

    Let me show you visually how we deal with paired trades, with the story of our very first paired trade on TER and INTC entered on 7/22/10. In just 5 days, this pair’s P&L is shown here

     

    Opened ET

    B/S

    #

    Symbol

    Price

    Current Price

    P/L

     

    7/22/10 14:28

    SELL

    1,000

    INTC

    21.76

    21.33

    $430

    7/22/10 14:27

    BUY

    1,314

    TER

    10.13

    10.21

    $105

     Graphically, the profit has ramped up nicely in 4 trading days to $535

     

    Since, in today’s news after markets closed, TER is up over 7%, it is very likely that this pair will ramp higher in profit on Thu, July 29, 2010.

    The picture below shows that when we decided to enter this paired trade, our proprietary signal Value (shown on the Y-axis) on this pair was at the bottom extreme of an oscillating wave. It has since then been closing into the zero line on the X-axis. We will close the trade out as soon as it hits the zero-crossing on the X-axis.

     

    Here's the latest from the BeatIndex’s Trading Signals Alert Service which entered one new paired stock trade today July 28, 2010:

    7/28/10 10:55

    SELL

    300

    ITT

    49.84

    49.85

    ($3)

    7/28/10 10:55

    BUY

    361

    GD

    62.1

    61.8

    ($108)

     Sign up for your free trial here.

      All open positions in this system on July 28, 2010 are shown below 

    Opened ET

    B/S

    #

    Symbol

    Price

    Current Price

    P/L

    7/22/10 14:28

    SELL

    1,000

    INTC

    21.76

    21.33

    $430

    7/23/10 11:17

    BUY

    342

    BAC

    13.61

    13.99

    $130

    7/22/10 14:27

    BUY

    1,314

    TER

    10.13

    10.21

    $105

    7/23/10 10:30

    BUY

    477

    HST

    13.87

    14.46

    $281

    7/23/10 10:30

    SELL

    300

    PSA

    95.13

    98.67

    ($1,062)

    7/23/10 11:01

    BUY

    369

    PHM

    8.41

    8.59

    $66

    7/23/10 11:01

    SELL

    300

    DHI

    10.53

    10.64

    ($33)

    7/23/10 11:06

    SELL

    300

    TSS

    15.37

    15.06

    $93

    7/23/10 11:06

    BUY

    283

    FISV

    46.71

    48.88

    $614

    7/23/10 11:08

    BUY

    282

    MDP

    31

    31.55

    $155

    7/28/10 10:55

    SELL

    300

    ITT

    49.84

    49.85

    ($3)

    7/23/10 11:09

    SELL

    300

    TWX

    31.02

    31.27

    ($75)

    7/28/10 10:55

    BUY

    361

    GD

    62.1

    61.8

    ($108)

    7/23/10 11:14

    SELL

    300

    KEY

    7.91

    8.46

    ($165)

    7/26/10 9:30

    BUY

    300

    ITW

    43.51

    43.34

    ($51)

    7/23/10 11:15

    BUY

    512

    ZION

    20.24

    21.26

    $522

    7/26/10 9:30

    SELL

    358

    PH

    62.13

    61.81

    $115

    7/23/10 11:16

    SELL

    300

    NDAQ

    18.37

    19.34

    ($291)

     

    You can check out more performance metrics on this system, when you sign up for your free trial here.



    Disclosure: None
    Stocks: INTC, BAC, TER, HST, PSA, PHM, DHI, TSS, FISV, MDP, ITT, NDAQ
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