Can I use Options to Pair Trade Stocks?
Q: I was wondering if you or any of your subscribers have implemented the strategy using options; e.g., when a signal is generated buying an at the money call for the stock purchased and buying an at the money put for the stock that is sold?
A: It depends on the underlying universe of securities that you wish to pair trade. If you are looking to pair trade highly liquid U.S. Equities, then using options to pair trade is a GREAT idea because:
1. Options provide about 10:1 inherent leverage
2. The options strategy has a built-in time stop
3. The options strategy has a built-in max loss stop loss
Provided a liquid option market exists on both symbols in the pair, its a great way to go.
You can reduce the outlays by buying both call spreads and put spreads too.
The best discussion we've seen of the strategy is in Douglas Ehrman's book below:
https://www.amazon.com/Handbook-Pairs-Trading-Strategies-Equities/dp/0471727075
You can also find some material in our Resources Library here:
https://blog.pairtradefinder.com/pair-trading-research-studies-articles/
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