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Pairs builder

  1. 1. Counter-Condor The Ultimate in Market Neutrality Jay A. Leavitt, PhD [email_address]
  2. 2. Pairing ETFs with Their Inverses [email_address]
  3. 3. Market Neutrality [expected] <ul><li>TNA + TZA </li></ul><ul><li>QLD + QID </li></ul><ul><li>On any given day, if you were to trade both members of either pair, </li></ul><ul><li>at the end of the day you would expect to end up even </li></ul>[email_address]
  4. 4. Paired ETF Rorschach [email_address]
  5. 5. Testing <ul><li>All Entries 3 to 5 weeks from Expiration </li></ul><ul><li>Trades closed at next expiration Date </li></ul><ul><li>ThinkorSwim data & results in TOS Paper Trader </li></ul>[email_address]
  6. 6. New Approach The Counter-Condor Strategy <ul><li>Two spreads, one per ETF </li></ul><ul><li>Just Out of the Money [OTM] </li></ul><ul><li>Short time to expiration </li></ul><ul><ul><li>Individually, each spread has Low Probability </li></ul></ul><ul><ul><ul><li>The spreads are chosen so that as one decreases in value, the other increases </li></ul></ul></ul><ul><ul><li>Each spread has a good Reward to Risk ratio </li></ul></ul><ul><ul><li>Stop losses are not used </li></ul></ul>[email_address]
  7. 7. Counter – Condor 1 Trade / Month [email_address]
  8. 8. Money Management <ul><li>Trade Allocation </li></ul><ul><ul><li>It is possible to have 100% loss! It never happened in the TNA/TZA back-test. </li></ul></ul><ul><ul><li>Only amount we can afford to lose – even in 2 consecutive trades </li></ul></ul><ul><ul><li>Fixed amount allocated to each trade </li></ul></ul><ul><li>Example </li></ul><ul><ul><ul><li>With a trade equity of $100,000 allocate 10% [$10,000] </li></ul></ul></ul><ul><ul><ul><li>Based on our data, this account will have a negligible draw-down. The allocation grows ~ 12 x 35% / year = 420%. The account grows 42% annually. </li></ul></ul></ul>[email_address]
  9. 9. Profit/Loss <ul><li>Red and Blue are the Profit/Loss curves for the spreads on the inverse ETF pair. </li></ul><ul><li>Green is their sum. It is the Profit/Loss curve of the pair trade. </li></ul><ul><ul><li>Loss in one spread is offset by a gain in the other. </li></ul></ul><ul><ul><li>Both wings are the same height. </li></ul></ul>[email_address]
  10. 10. Extension to Correlated ETF Pairs [email_address] 84% Winning Trades; Average Gain per Trade > 50%
  11. 11. Only 10% per Month [email_address]
  12. 12. Repair Strategy <ul><li>Each spread is only 1 point </li></ul><ul><li>Each ETF is 3X leveraged </li></ul><ul><ul><li>Therefore, we anticipate 100% winners </li></ul></ul><ul><ul><ul><li>This is unrealistic! </li></ul></ul></ul><ul><li>If the price of our ETF is between strikes when close to expiration  </li></ul><ul><ul><li>Buy ATM Condor of underlying or </li></ul></ul><ul><ul><li>Roll trade to next month </li></ul></ul>[email_address]
  13. 13. Repair Example <ul><li>Assume we’re trading the TNA/TZA spreads and TZA is between its spread strikes </li></ul><ul><li>Buy the ATM condor for IWM </li></ul><ul><ul><li>TNA, TZA are 3X leveraged of IWM </li></ul></ul><ul><li>How many to buy? </li></ul><ul><ul><li>When the condor credit matches the pairs trade risk the 2 trades will neutralize each other. </li></ul></ul><ul><li>IWM is used because its options are much more liquid than the ETF options. </li></ul>[email_address]
  14. 14. Wrap-up <ul><li>Counter-Condor is a powerful trading system </li></ul><ul><ul><li>Market Neutral </li></ul></ul><ul><ul><li>High probability of a winning trade </li></ul></ul><ul><ul><li>High average trade gain </li></ul></ul><ul><ul><li>Low exposure to risk </li></ul></ul><ul><ul><li>Couch Potato </li></ul></ul><ul><ul><li>Repair Strategy </li></ul></ul>[email_address]
  15. 15. Subscribe to the Pairs Builder newsletter & Watch Your Equity Grow [email_address]

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option trades pairs of inversely correlated and correlated ETFs, including leveraged ETFs.


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