Neutral Trading Strategies for an Inactive Market
Jun 6, 2022
What do you do when the dust settles, the smoke clears, and you’re left with middling markets? After quite a volatile May, June has seen the stock market bounce back (albeit slightly) and the US dollar cool off.
One of the most common ways to view pairs trade, or spread trade, opportunity is through the lens of convergence and divergence. You can look at two highly correlated products like stock futures or interest rate futures, measure how much they’ve converged or diverged, and then choose to go with or against such price action.
For example, stock futures Small Technology (STIX) and Small Stocks (SM75®) have gone from trading around the same price a year ago to the former trading at a $35 discount. If you think the trend will continue, you can sell the underperformer (STIX) while buying the outperformer (SM75). Think the two markets will converge? You can buy STIX and sell SM75.
A similar story is being told in the yield curve as US interest rates of varying duration flatten to historical lows. Traditionally, longer-term rates trade higher than shorter-term ones. Recently, however, the difference between 10YR and 30YR rates has come down to nearly 0% after trading at around a 0.7% premium of the latter over the former. This can be seen and traded in S10Y and S30Y futures. Think they’ll converge further and potentially invert the yield curve? You can sell S30Y and buy S10Y. Those thinking the curve will return to normal can do the opposite.
Options derivatives can give you another opportunity to profit from a market remaining range bound. The short strangle includes a short call and put option and is a strategy rewarding the inactive market thanks to its neutral outlook.
As USD cools off from its bull run, a short SFX strangle (for example, -1 156 put and -1 161 call) could show potential if the forex market continues to coil. While the strategy can be expensive using stock or ETF options, a short strangle in SFX options is currently requiring between $100 and $200 in capital.*
Pairs trades and neutral options strategies alike can profit from markets trading in a range, and, if the summer continues to trend in this sideways direction, such opportunities could be booming.
Follow us on Twitter: https://twitter.com/small_exchange
Subscribe to our YouTube Channel: https://www.youtube.com/channel/UC5pAsul3H_7FYuPmZscClrA
*Values taken on 6/3/22 (July 15, 2022 Expiration)
© 2022 Small Exchange, Inc. All rights reserved. Small Exchange, Inc. is a Designated Contract Market registered with the U.S. Commodity Futures Trading Commission. The information in this advertisement is current as of the date noted, is for informational purposes only, not intended as a recommendation, and does not contend to address the financial objectives, situation, or specific needs of any individual investor.The information presented here is for illustrative purposes only, and is not intended to serve as investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Trading in derivatives and other financial instruments involves risk.
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
tastytrade content is provided solely by tastytrade, Inc. (“tastytrade”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. tastytrade, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastytrade is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparison, statistics, or other technical data, if applicable, will be supplied upon request. tastytrade is not a licensed financial advisor, registered investment advisor, or a registered broker-dealer. Options, futures and futures options are not suitable for all investors. Prior to trading securities products, please read the Characteristics and Risks of Standardized Options and the Risk Disclosure for Futures and Options found on tastyworks.com.
tastytrade is a trademark/servicemark owned by tastytrade.
tastyworks, Inc. ("tastyworks") is a registered broker-dealer and member of FINRA, NFA and SIPC. tastyworks offers self-directed brokerage accounts to its customers. tastyworks does not give financial or trading advice nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastyworks’ systems, services or products. tastyworks is a wholly owned subsidiary of tastytrade, Inc (“tastytrade”).
tastyworks, Inc. (“tastyworks”) has entered into a Marketing Agreement with tastytrade (“Marketing Agent”) whereby tastyworks pays compensation to Marketing Agent to recommend tastyworks’ brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastyworks. tastytrade is the parent company of tastyworks. tastyworks and Marketing Agent are separate entities with their own products and services. tastytrade has different privacy policies than tastyworks.
Quiet Foundation, Inc. (“Quiet Foundation”) is a wholly-owned subsidiary of tastytrade The information on quietfoundation.com is intended for U.S. residents only. All investing involves the risk of loss. Past performance is not a guarantee of future results. Quiet Foundation does not make suitability determinations, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of Quiet Foundation’s systems, services or products.
Small Exchange, Inc. is a Designated Contract Market registered with the U.S. Commodity Futures Trading Commission. The information on this site should be considered general information and not in any case as a recommendation or advice concerning investment decisions. The reader itself is responsible for the risks associated with an investment decision based on the information stated in this material in light of his or her specific circumstances. The information on this website is for informational purposes only, and does not contend to address the financial objectives, situation, or specific needs of any individual investor. Trading in derivatives and other financial instruments involves risk, please read the Risk Disclosure Statement for Futures and Options. tastytrade is an investor in Small Exchange, Inc.