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Pairs Trade Analysis

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.

Pairs trading is used to take advantage of the change in relationship between two underlyings. This is done by being long one underlying and being short the other. In this segment we look at pairs trading between DIA and SPY with options.

The study:
  • 2005-Present
  • 45 DTE
  • Simulated Pairs Trades when SPY and DIA daily returns diverge >0.25%, >0.50%, >0.75%
  • Sold 30∆ Call in over performer and sold 30∆ Put in under performer
Results:
  • Average P/L was greatest when trades were placed when divergence was >0.75% but win ratio was highest when trades were placed when divergence was >0.25%
  • Pairs trading with options is historically profitable and allows us to capture divergence in two highly correlated assets while collecting premium.

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