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Another Example of a Pairs Trade - Nasdaq 100 v S&P 500 Index

  • This is a chart showing the Nasdaq 100 versus the S&P 500 index, using their tracking stocks QQQ and SPY
  • Anyone who had bet that the Nasdaq would have out-performed the broader S&P 500 index anytime since the October 2002 lows would have generated excellent tax-free profits

A Pairs Trade is NOT a bullish/bearish trade on the market

A pairs trader using spread bets is really trying to take the overall direction of the underlying market out of the equation and just speculate on the difference between the two share prices.

  • In the Vodafone/MMO2 example it would be possible to make money on the trade if the FTSE went up 25%, and well as if the FTSE slumped 25% due to the fact that the pairs trader is simply betting that Vodafone will out-perform MMO2. See the examples below;
Spread Bet
FTSE 100 Gains 25%
VOD gains
35%
MMO gains
15%
P&L
Buy £5 of VOD
at £1.20
£1.62
n/a
£210
Sell short £10 of
MMO2 at £0.60
n/a
£0.69
(£90)
Total Profit
£120

Spread Bet
FTSE 100 Loses 25%
VOD loses
16%
MMO loses
40%
P&L
Buy £5 of VOD
at £1.20
£1.01
n/a
(£95)
Sell short £10 of
MMO2 at £0.60
n/a
£0.36
£240
Total Profit
£145

>> Page 3 - Pairs Trading

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