Market Measures

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Defined Risk Pairs Trades

Market Measures

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Last week, we looked at a pairs trade betwen SPY and DIA, where we traded a cross-product Strangle. This week we will look at the same pairs trade, but rather than looking at the cross-product Strangle, we will look at the cross-product Iron Condor (selling a Put Spread in one underlying and selling a Call Spread in the other).

  • 2005-Present
  • 45 DTE
  • Simulated Pairs Trades when SPY and DIA daily returns diverge >0.25%, >0.50%, >0.75%
  • Sold 30∆/10∆ Call Spread in over performer and sold 30∆/10∆ Put Spread in under performer
  • Compared results to selling naked premium for pairs trade (last week's study).
  • Defined risk pairs trades show similar win ratios and slightly lower average P/L compared to their undefined counterparts.
  • Traders who prefer defined risk trades can feel confident when pairs trading, as buying protection doesn’t impact results too much.

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