Despite a languid share market, two pairs trades highlighted on this blog illustrate the potential for profit from pairs, at lower market risk, regardless of the overall direction of the market. Today’s post looks at the performance of these trades so far.
On April 12 and 13, I posted on pairs trading – going long one share (or commodity, currency, index), and short another share. There are two “live” trades, posted here:
David Jones vs Myer
Woodside vs Oilsearch
The methodology is explained here:
So, how have the trades gone so far? This chart shows the return of the two trades, graphed against the return for the period for Australia 200 index. Please note, the returns on the pairs trades do not take into account trade and financing costs, and assume that the trades where entered at the opening price on the day the trade was blogged:
As you can see, the score (at yesterday’s close) was 1 out of 2.
The Woodside/Oilsearch trade is DOWN 3.3%. Oilsearch announced an increase in gas reserves based on drilling results – unexpected, and a major positive for the company.
The David Jones / Myer trade is UP 6.7%. Market action suggests that industry wide issues are the key price drivers, and the prices have reverted to a more “normal” relationship.
The Australia 200 index is UP 2.5% for the period.
These results illustrate the key point – profits and losses on pairs trades are not directly related to the direction of the market. While traders are likely to cut WPL and OSH, and run DJS / MYR, other traders take a portfolio approach to pairs, running large numbers of pairs positions.