Pair options allow you to trade a well-defined market neutral strategy which can produce profits under all market conditions, i.e. bullish or bearish trends, etc. This is because they enable you to speculate on the relative performance or two highly correlated assets operating in the same market sector, e.g. BP/Shell, over a specified period of time.
Þ Trader Level: Intermediate
Þ Risk Level: Low
How Pair Options Work
Pair options have been constructed so that correlation can be used as a parameter to assess the ongoing relative performance of two assets as a percentage. This feature facilitates the construction of basic pair options strategies based on statistical analysis using established technical indicators, such as the Bollinger Bands, mean derivation and Fibonacci numbers, etc.
Consequently, you have better chances detecting new quality trading opportunities using pair options because you can exploit these impressive statistical features. Basically, you must learn how to use correlation to identify divergence which will occur when the first asset of a pair starts to either out-perform or under-perform the second one. Once you make this determination you will be able to place a pair options trade in favor of the stronger asset. Your efforts to master these skills will be worthwhile especially because one of the most important benefits of pair options is that they involve low levels of risk.
Pair Option Strategy in Action
- Identify Asset Pairs: Compile a portfolio of asset pairs that are highly correlated e.g. Amazon/Apple, BT/Vodafone, Exxon/Shell, etc. Then devise methods using fundamental or technical analysis to allow you to monitor the key parameters of the two securities comprising those pairs of interest, i.e. performance history, relative growth and volume, etc. Premier pair options brokers, such as StockPair, supply a wide selection of tools to allow you to perform this task competently.
- Rating: Rate the asset pairs in your portfolio using statistical models such as Fibonacci numbers or the mean-diversion concept. For instance, outperforming assets will have low ratings while under-performing ones will register high values. Your basic pair options strategy will then advise you to open a Pair Options trade in favor of the asset which posts higher ratings.
- Initiate Trade: Open a Pair Options trade in favor of the asset that begins to outperform the second asset.
By devising basic pair options strategies constructed on the concepts outlined above, you will then definitely increase your chances of trading successfully especially by keeping your costs low and utilizing a high end pair options trading platform such as StockPair.
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