Market Measures

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Defined Risk Pairs Trades

Market Measures

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).

Study
  • 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).
Results
  • 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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