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

Includes: HD, LOW
by: Elias Tsepouridis

That was a perfect up and down for the duration of the Home Depot (NYSE:HD)/Lowe's (NYSE: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

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