6

How can I bet that company (a) will outperform company (b)? It seems like the simplest way would be to buy long company (a) and short company (b). However, this strategy seems crude since I will still be subject to swings in the market and the attendant margin calls.

Specifically, I am looking at two tech stocks operating in the same market. I believe one of them will outperform the other, but I don't want to be exposed to the volatility of this sector in general since tech stocks can be "irrationally" priced for long periods of time.

Is there a financial instrument available to non-institutional investors that bets on relative pricing?

smcgregor
  • 171
  • 3

3 Answers3

6

You can engage in a pair trade that involves analyzing how closely percentage wise these stocks trade tick for tick. You can bet on the ratio expanding or contracting.

only slightly more information here, but maybe explained more intuitively: http://www.investopedia.com/terms/p/pairstrade.asp

and here is an example: (web.archive.org) http://www.investopedia.com/university/guide-pairs-trading/pairs-trade-example.asp

Mingwei Samuel
  • 103
  • 3
CQM
  • 20,209
  • 6
  • 54
  • 93
4

Any portfolio, even one composed of risk-free assets is subject to risk.

That said, to short an equity without margin risk, puts can provide. To replicate a short without excess margin, an at the money put should be used. To take on less leverage, a deep in the money put can be used. Puts are not available on equities deemed illiquid by regulation.

A long/short portfolio can help mitigate variance risk, but then the problem becomes the risk of a lack of volatility since options decline in value over time and without a beneficial change in the underlying.

-3

Your strategy of longing company(a) and shorting company(b) is flawed as the prices of company(a) and company(b) can both increase and though you are right , you will lose money due to the shorting strategy. You should not engage in pair trading , which is normally used for arbitrage purposes

You should just buy company(a) since you believed its a better company compared to company(b) , its as simple as that

Computernerd
  • 962
  • 7
  • 17