Pairs builder
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option trades pairs of inversely correlated and correlated ETFs, including leveraged ETFs.
![Counter-Condor The Ultimate in Market Neutrality Jay A. Leavitt, PhD [email_address]](https://image.slidesharecdn.com/pairsbuilder-120205105439-phpapp02/85/pairs-builder-1-320.jpg)
![Pairing ETFs with Their Inverses [email_address]](data:image/gif;base64,R0lGODlhAQABAIAAAAAAAP///yH5BAEAAAAALAAAAAABAAEAAAIBRAA7)
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Pairs builder
- 1. Counter-Condor The Ultimate in Market Neutrality Jay A. Leavitt, PhD [email_address]
- 2. Pairing ETFs with Their Inverses [email_address]
- 4. Paired ETF Rorschach [email_address]
- 7. Counter – Condor 1 Trade / Month [email_address]
- 10. Extension to Correlated ETF Pairs [email_address] 84% Winning Trades; Average Gain per Trade > 50%
- 11. Only 10% per Month [email_address]
- 15. Subscribe to the Pairs Builder newsletter & Watch Your Equity Grow www.GrabtheCashandDash.com [email_address]
Editor's Notes
- I am going to introduce you to a new and unusual trading system that I developed. It is unusual because it is based on putting on a pair of trades that you would think pointless. furthermore, the strategy does not rely on choosing the correct market direction. In spite of these facts, this strategy will make a good profit a high percentage of the time. It generates exceptional annual returns. You will see our remarkable testing results. Counter-Condor does not employ any parameters. Consequently, our unusual results have not been produced by means of optimization. This strategy is for sophisticated traders although it can be autotraded. It requires using options in a fashion similar to iron condors. I call this strategy the counter-condor. I chose this name because, in many ways, it is the opposite of the iron condor
- Where going to look at what happens when you trade leveraged ETFS simultaneously with their inverses.
- Here are two examples. At the top are two ETF’s which are 3X leveraged for the Russell 2000. One is the inverse of the other. Below are 2 similar ETFs representing the Nasdaq 100. THEY ARE LEVERAGED 2x. If on a given day, you had bought both TNA and TZA, at the end of the day you would expect to have neither a profit nor a loss The same applies to QLD and QID.
- If these pairs were constructed correctly their charts would be symmetric about the zero axis. It would look like a Rorschach. But that is not the case. Their center line falls at a rates of about 4% per month. This is where my journey began. I wanted to see if I could take advantage of this phenomenon. I began attacking the problem by testing if options might work.
- The first 2 conditions imply each trade will last about a month Thinkorswim uses actual trade data in its back tester. Theoretical data was not used in these tests.
- Here we are employing two spreads, each in the same direction. But they will be on the paired ETF’s facing in opposite directions. These spreads will be just out of the money. These spreads will have a Low probability of success. However, as one of these loses value the other gains. Because of their low probability, we benefit because each has a very good reward to risk ratio. Let’s look at the results
- Each bar represents 1 trade/month with an average gain per trade over 25%.
- Option traders must be prepared to lose their entire cost of their trade when they put it on. Although we want our equity to grow, we want to keep the equity at risk minimal. With Counter-Condor , you can do that. Let’s go through our example. We’re only going to risk 10% of our account by allocating $10,000 to each trade. Reviewing our data, this produces hardly any draw-down With an average gain over 35%/trade, the account realizes an expected 42% growth per year without any compounding.
- Whenever a Counter-Condor trade is considered, both the risk are reward are known. The potential reward is shown by the height of the wings in this chart. In this example, the wings, represented in green, are showing a potential 25% trade gain. It allows us to decide if the trade will be worthwhile. It also helps us to deal with the bid ask differences in each of the spreads.
- I’ve been able to extend the Counter-Condor strategy to trade pairs of correlated ETFs. The extension of the Counter-Condor increases the number of trade combinations available each month. This allows us to identify the pairs trades with the best reward to risk potential and the greatest liquidity.
- The previous slide showed some 100% losing trades. These could have been avoided by either buying a condor to offset the risk or by rolling the trade into the next month.
- If it’s the week of expiration and the price of TNA or TZA is between its spread strikes, the risk can be neutralized with a long condor. This is a credit. TNA & TZA are both leveraged ETFs of IWM, which represents the Russell 2000. In this case, because of liquidity, the IWM condor could be used. This repair strategy assumes that the price of IWM will not have moved much at expiration which is only a few days away.
- There are many reasons why Counter-Condor is so attractive. We don’t care if the market is going to go up or down; whether there is war or congress passes a good budget. Because of the high pairs correlation, the leverage and the 1 point strike spreads probability is in our favor. We know the risk and reward in advance. Once a trade is placed we can just relax.
- Come to my website, GrabtheCashandDash, and let me show you how to trade profitably.