Long-Short trade

[MrGecko]

OK - been talking to arabian et al about this yesterday, thrown around lots of ideas (most of which are useless). Basically, I am putting on a paper Long-short equity trade, just for a laugh really.

I know very little about the equity markets, but anyway: my trade is going Long Apple Inc. (AAPL) and short International Business machines (IBM).

The justitification is really quite stupid:

*AAPL has just broken trendline resistance, and I think IBM will falter a bit.

* Historically, the spread hasn't been less than 0 for long.

* From what I can tell, AAPL has the slightly better fundamentals (wishing I had paid attention in those bloody lectures now)... basically it has higher PE ratio, higher EPS, a healthier balance sheet, and more people are short AAPL than IBM (looking for a short squeeze to kick things off) - it should trade higher than IBM.

* IBM is focused in the industrial market, AAPL the retail - I think the cost cutting going on all over the place will dent IBM's revenue's, while everyman and his dog will want an iPhone Nano (if they exist).

* Steve jobs will either get better, or the market will realise that the people running it are very well qualified (and the talent has stayed, the designers + marketing teams).

*AAPL has a higher Beta than IBM, and if this is a bottom (or temporary bottom) in the equity markets, I should end up net +ve beta.

* the limited stats I could be bothered to do indicate a strong +ve correlation

* the two are very closely priced, which makes it easy for me to do the sums.


well, thats about it.

I will record the prices I "enter" at by posting them here, then we just sit back and watch!

 

[MrGecko]

OK - fills are:

AAPL + 100 @ 93.15
IBM - 100 @ 94.08

thus spread = -0.93

watch this space!

 

[MrGecko]

For the record, my Hard stop is at -9.20 (i.e. IBM is $9.20 more expensive than AAPL), which is the 5yr low at least.

If it gets lower than than then clearly I am wrong, but I might choose to bail on the position before that, at my discretion.

 

[timsk]

Hi MrG,
I've been thinking along very similar lines recently and the essence of the idea appeals a lot; a pairs trade with a twist one could say. The obvious problem - as I think you've found - is that one is very unlikely to find two stocks that make a good pair and that both display actionable TA based set ups that enable one to enter opposing trades simultaneously. I was thinking of looking for two stocks that are trending strongly in opposing directions (within the same sector, as you've done) and then waiting for the market to move strongly in either direction. If it goes down, it will take the weak stock with it while, in theory at least, the strong stock will flatten out or possibly pull back a little, but nothing like as much and without the momentum with which the weak stock falls. Visa versa for a strong up trend day. Stop loss would be a set $/£ amount based on the cumulative position, essentially treating the pair as one trade. The idea of being hedged against the vagaries of market sentiment appeals, although it's difficult to test meaningfully as the set up isn't strictly TA based. Anyway, I look forward to hearing how this trade - and the idea as a whole - pans out. Interesting stuff.
tim.

 

[MrGecko]

Tim,

As the trade isn't really meant to be an intra day, or conventional swing trade, I neglected the TA aspects of picking an entry - I just wanted to get the thing on.

Of course, there is nothing to stop you actively managing the two positions - in this case I have opposing positions of + / - 100 shares respectively. I could, if so inclined, give myself an intra-day "un-hedged" position limit of, say, 50 shares - for example, say I thing that AAPL are going to sell off in a move that is AAPL specific (just off resistance or whatever)... I could allow myself to SELL 50 of my AAPL shares (leaving me with a NET position of +50 IBM) and re-enter the hedge at a better level.

Provided I kept within my "unhedged" limits, and ensured that I always closed the day with equal positions, the opportunity exists to profit from the intraday moves while riding the longer term trade.

Infact I'm sure that this kind of thing occurs.

What I like about this approach is that it gives one the opportunity to "think big" - of course, I am not accustomed to making trading decisions like this, but that is not to say it can't be done. Moreover, in some sense I think it is easier that regular stock picking... you just have to have a good idea about what you think will happen in a certain marketplace, find the winner and the loser, and stick it on.

Lastly, but by no means least, Long-Short is a recognised investment strategy in the institutional arena - and the opportunity to give it a crack kind of blows my skirt up.

The next problem, of course, is that I have to think of more...

FWIW the spread is now @ -0.04, having briefly turned +ve... each 0.01 unit in the spread equates to about 0.005% return on the total cash value of the positions - i.e. no leverage at all.

 

[arabianights]

I will take the other side of this.

You should have done my dual straddle idea

 

[MrGecko]

Ok, next trade...

(disclaimer: this trade isn't actually possible because I cant short financial stocks... but I'm sure you could put a CFD on or something to replicate the position. I had a look at selling some OTM calls to get the same Delta but it's too much hassle for now).

Anyway, the trade is Short American Express, Long Visa

because:

* American Express is largely used by businesses, particularly for expense accounts - which, I reckon, are going to be cut short - ergo less revenues for AXP.

* Moreover, looking at the fundamentals (from Yahoo! finance), the EPS figures have been falling over the last 4 quarters, and the estimated EPS for teh stock keeps on getting revised downwards. The stock is forecast to grow less than the industry.

* Visa, on the other hand, is used by everyday Joe Bloggs. It is accessible, widely recognised, and you can use it for credit cards in the usual sense (i.e. pay interest)... as well as teh regular debit card. Fundamental EPS estimates look to be holding up, it had the best Q/Q growth of its competitors, and the biggest operating margins.

That is about the crux of my position - Amex are going to lose out on revenue from businesses, Visa are a safe bet from the consumer market. A secondary position is that internet retail figures should improve in the tighter economic conditions, so that should add a bit of wind to the sails of Visa too.

Briefly, on the technical side, theres not alot to say - AXP looks to be in a continued downtrend, while V might be recovering from an oversold price...

Anyway - the prices are different, so I am taking a bigger position in AXP than in Visa.. both have a good +ve correlation and are equally volatile, give or take a bit.

The trade is then:

AXP -264 @ 17.46
V + 100 @ 46.99

making the spread between the two about -1... again, this has been positive for most of the life of the stocks - i.e. Visa has typically been > 2.64 * AXP... historical lows are at -6 ish, which is where I will cut my position.

This trade is about half the cash value of the first one. Lets see how we get on.

 

[MrGecko]

OK - change of plan

Right... I've been thinking about this more, and I'm going to make an adjustment to the trade criteria: The whole plan here is to record trades that don't use TA as the basis for being long or short.

Most of us watched the Million Dollar Traders thing on the telly - well I am going to try and do the same thing - that is, manage a portfolio of positions I believe in for fundamental reasons. We get alot of TA traders here, there are endless discussions about placement of stops, indicators, scalping 5 min timeframes etc, but nothing about Buying and Holding or building positions on Macro views - I'm going to give it a crack.

As previously stated, I don't really know what I'm doing when it comes to equities (or much else TBH), but hopefully the trade ideas will become more defined and I will begin to develop some more refined techniques as time goes on.

So, I am going to list my positions as I enter, and give as best an explanation I can for why I have chosen the trade (as with the two pair trades from before). I am not limited to equities - I can, for example, add in the price of a corporate bond and accrue the interest if I so choose. I doubt I will be managing the positions intra-day because I have my real trading to be getting on with, but I will try and update at EOD or with changes on the portfolio, etc...

The important things are this:

1) No PA trades

2) No leverage*

And we will see if I can manage to build a strong book.

Since I had the idea, I added two ETF's to my portfolio: Long both an Oil fund and a Gold fund.

So my portfolio, as it stands, looks like this:

AAPL +100 @ 93.15
IBM -100 @ 94.08
V +100 @ 46.99
AXP -264@ 17.46
DGL +66 @ 33.02
OIL + 100 @ 19.45

The initial value of my positions sums to $32,155.76 with todays PnL as $268.24 (+0.834%)

Cant remember seeing anything like this on T2W before, so excited to see how we get along.

* at some point I am going to use futures and options...

 

[N Rothschild]

looks good cept the AMX theory i dont agree....

 

[MrGecko]

looks good cept the AMX theory i dont agree....

Well you can't just leave it at that, can you??!!

 

[N Rothschild]

lol i dunno i just see amx as quite a strong stock for a financial (if there is such a thing) they are also a vertically integrated company. and as you said they are based more on business's (altho im not sure how true that is remember amx is huge in US compared 2 here). imo its business's that are more likely to keep spending on credit etc as apposed to the general polulation (visa) due to the current outlook on credit etc. i know thats a **** explantion but im v v tierd lol

 

[N Rothschild]

even tho visa is worth more i would say it looks the weaker from the 2 stocks (TA) mastercard isnt holding up to great as well, mayve look at a mastercard vs visa play?

 

[MrGecko]

New Position

I'm buying McDonalds and Shorting Starbucks.

because:

I just went into starbucks and it was empty - usually it is jam packed with stay at home mums or au pairs. There were 3 people working.

Mcdonalds... just realeased its results which were aboiut inline, though there were hopes for good numbers in the market. Seems to be holding up well in the malaise.

MCD + 100 @ 57.92
SBUX -600 @ 9.50

 

[N Rothschild]

starbucks just announced 7000 job cuts aswell

 

[gooseman]

I'm buying McDonalds and Shorting Starbucks.

because:

I just went into starbucks and it was empty - usually it is jam packed with stay at home mums or au pairs. There were 3 people working.

Mcdonalds... just realeased its results which were aboiut inline, though there were hopes for good numbers in the market. Seems to be holding up well in the malaise.

MCD + 100 @ 57.92
SBUX -600 @ 9.50

i like your fundamental analysis

are you trying to prove that you are better than Team Lex van Dam? ;-)

 

[MrGecko]

New Position

Looking to collect some Theta and +ve Vega from some SPX options... think VIX is slowly going to grind down (discussed this trade as early as last year, never had cause to do anything about it. Thanks must go to Macro Man for giving me the impetus to put it on)

BUY 1 mar09 740/760 Call spread
SELL 1 mar09 940/960 Call spread

Debit $1250
Delta -1.75
Gamma -0.15
Theta +17.44
Vega -50.30

 

[gooseman]

like the condor,

 

[MrGecko]

New Position

The Baltic Dry index looks to be picking itself up from the lows. If commercial Paper and trade credit start to move again, the outlook is +ve.

(initially looked to buy Maersk, just because it reminded me of Gib. Couldnt find any liquid stock ín the 3 or 4 mins I spent looking, so had to find some others).

*Oversees Group:

Just announced a sale and lease back of some boats, says is likely to keep revenues similar to last years levels. In these conditions that makes it a good sector pick IMO...

*Nordic American Tanker Shipping Ltd.

There are two types of shipping: Suezmax and VLCC... VLCC is mostly used bewteen middle east and Asia, and because of the Oil contango it looking weak. Suezmax shipping rates seem to be holding up well, comparitavely. Nordic has all Suezmax tankers

(source: Which Way Are Shipping Stocks Headed? -- Seeking Alpha - see, my nascent career as an equities analysts involves free articles on the internet).

OSG +50 @ 35.39
NAT +50 @ 29.43

 

[porph]

Interesting stuff.

 

[timsk]

Yo MrG',
A request and a couple of observations:
I like your simple 'tell it like it is' funnymental analysis and I completely understand that you're purposefully not taking TA considerations into account. Nonetheless, peeps like me can't help looking at the charts anyway! So, my request is - any chance of you posting a chart showing your entry (and exit) please? The value of this is that with the benefit of hindsight, it'll be interesting to see whether simple TA would add to - or subtract from - the net P/L.

Following on from the above, I attach charts for your MCD and SBUX pairing. To my mind they're both in rangebound drift mode. There's nothing in the charts that I can see to support the entry decisions. Again, I understand that that isn't the point - I'm just making an observation.

Lastly, on your most recent trade, by my calculations you're 20% down on your position size for NAT. I think it should be 60 shares, not 50. I know it sounds pedantic but, multiplied over a number of trades (15% here, 25% there etc.), I'm thinking it could skew your results over time. Just a thought - probably not important.

Re-reading my post I almost scratched it because it sounds like I'm being a pain in the backside - which I don't mean to be, honest guv'! By all means to tell me to go copulate with the natives in far off distant lands . . .
Tim.