By learning to pair call and put options on stocks within a sector, option traders and investors can earn substantial profits while still controlling downside risk.

Hughes Optioneering

The volatility seen in the broad market of late has spooked more than a few bulls into sitting on the sidelines. However, by pairing calls and puts on two sector peers, investors can profit in both up and down markets—and reduce their stock-specific risk. Pairs trading is best suited for traders who are bullishly or bearishly biased toward a certain stock, but who remain nervous about sector-specific or market-wide shakeups.

First, the pairs trader would purchase a call on a stock with the potential to move higher.

The trader would allocate roughly the same amount of money toward the call and put purchases, with both legs typically managed as a single trade. The best-case scenario is for the underlying stocks to move in the respective directions predicted, placing both the call and put positions in the money. However, the pairs trader can also profit if the returns on the call trade significantly exceed the losses from the put trade, or vice versa. In addition, the investor can guarantee a profit if one of the two options more than doubles in price by expiration.

Joe Burgoyne explores the topic of rolling options positions with Steve Claussen from OptionsHouse.

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OPTIONS Andrea Kramer Associate Editor, Schaeffer's Investment Research, Inc.

Is Pairs Trading Right for You? How Pairs Trading Works First, the pairs trader would purchase a call on a stock with the potential to move higher.

Benefits of Pairs Trading The best-case scenario is for the underlying stocks to move in the respective directions predicted, placing both the call and put positions in the money.

More Benefits of Pairs Trading, Plus Key Risk Factors pagebreak Plus, pairs trading allows you to exploit the principle of convexity. Related Articles on OPTIONS.

Options Pairs Trading - pezewehemave.web.fc2.com

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