Good morning. I am curious about how you ratio these type of trades at entry. Do you do them 1:1 or do you take the 2.1 ratio on March 1st into account and initiate the trade at equal dollar values?
So in this case 100 shares of SPY at $394.74 = $39,479 and 210 shares of IWM at $188.42 = $39,479.
Good question. In most cases we do the ratio trades 1:1 based on the notional value, so your example is absolutely correct. You basically just bet on the outperformance of one product vs another.
However, in other cases with less liquid products that take more time to enter and exit (eg. preferred stock vs benchmark etf) you can initiate the trade 1:1 but then you can use the liquidity of the ETF to adjust the trade if needed.
You can read more about it in one of our previous articles here:
Good morning. I am curious about how you ratio these type of trades at entry. Do you do them 1:1 or do you take the 2.1 ratio on March 1st into account and initiate the trade at equal dollar values?
So in this case 100 shares of SPY at $394.74 = $39,479 and 210 shares of IWM at $188.42 = $39,479.
Thanks in advance. Great post
Dave
Hi David!
Good question. In most cases we do the ratio trades 1:1 based on the notional value, so your example is absolutely correct. You basically just bet on the outperformance of one product vs another.
However, in other cases with less liquid products that take more time to enter and exit (eg. preferred stock vs benchmark etf) you can initiate the trade 1:1 but then you can use the liquidity of the ETF to adjust the trade if needed.
You can read more about it in one of our previous articles here:
https://hotf.substack.com/p/what-i-wish-i-knew-when-i-started