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Options Jive - August 8, 2025 - Mastering the Pairs Trade: A Step by Step Guide

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Manage episode 499034582 series 68544
Content provided by tastylive. All podcast content including episodes, graphics, and podcast descriptions are uploaded and provided directly by tastylive or their podcast platform partner. If you believe someone is using your copyrighted work without your permission, you can follow the process outlined here https://podcastplayer.com/legal.
Pairs trading capitalizes on price divergences between correlated assets while reducing directional risk by approximately 80%. This strategy involves betting on spreads between highly correlated markets like SPY and IWM (correlation around 0.8-0.9) or sector-specific stocks like airlines or banking. To set up a pairs trade: identify correlated assets that have recently diverged, calculate notional values, adjust for implied volatility, and determine the appropriate ratio. For example, when comparing SPY ($630) to IWM ($220), initial math suggests a 3:1 ratio, but after volatility adjustment, the proper ratio becomes closer to 2:1 (50 SPY shares to 100 IWM shares). Futures contracts offer more efficient pairs trading due to higher leverage and lower capital requirements compared to stocks. This approach increases trading opportunities during low volatility periods.
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1702 episodes

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iconShare
 
Manage episode 499034582 series 68544
Content provided by tastylive. All podcast content including episodes, graphics, and podcast descriptions are uploaded and provided directly by tastylive or their podcast platform partner. If you believe someone is using your copyrighted work without your permission, you can follow the process outlined here https://podcastplayer.com/legal.
Pairs trading capitalizes on price divergences between correlated assets while reducing directional risk by approximately 80%. This strategy involves betting on spreads between highly correlated markets like SPY and IWM (correlation around 0.8-0.9) or sector-specific stocks like airlines or banking. To set up a pairs trade: identify correlated assets that have recently diverged, calculate notional values, adjust for implied volatility, and determine the appropriate ratio. For example, when comparing SPY ($630) to IWM ($220), initial math suggests a 3:1 ratio, but after volatility adjustment, the proper ratio becomes closer to 2:1 (50 SPY shares to 100 IWM shares). Futures contracts offer more efficient pairs trading due to higher leverage and lower capital requirements compared to stocks. This approach increases trading opportunities during low volatility periods.
  continue reading

1702 episodes

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