Long & short trades against the index

By: ispeculatornew
Date posted: 04.11.2011 (5:00 am) | Write a Comment  (0 Comments)

      Post a Comment

One of the subjects that I get the most questions about is the method I use for trading technology stocks; long and short. I have written about it in the past and certainly have been fairly broad when discussing it which has generated more questions.

Last week I was asked what to do when I couldn’t find a “pair trade”. What did the reader mean? Simply that if you want to buy “Google” but cannot find a similar stock that you’d like to short against it, do you have any options ?  Of course, the answer is yes. This type of situation occurs very frequently for long and short traders. What I have usually done in such cases is simply do pair trades against stocks that are not as “fit” to be paired together. That is certainly one option but there exists another way to do it.

Trade against the index

What if instead of trading on the fact that Google will outperform a company like Microsoft or Yahoo, you traded on the fact that Google will either outperform or underperform the general index? That is certainly an attractive option and there are a few different ways to do it. While you could trade mutual funds, futures or other ways, I think the easiest by far is doing the trade against an ETF. Why?

-ETF’s are very liquid
-ETF’s are generally easy to short
-Non-leveraged ETF’s generally have reasonable shorting fees

As to what ETF should be traded, it would probably depend on the trade. The most appropriate one for the trades we do here would probably be one that tracks the Nasdaq index, such as QQQQ. To be more specific, we could also use one that specializes in internet stocks such as:

HHH (internet HOLDRs Trust),
BHH (B2B Internet HOLDRs Trust)
IAH (Internet Architecture HOLDRs Trust)
IIH (Internet Infrastructure HOLDRs Trust)
IVY (Ishares Dow Jones US Internet Index fund)

All of these could be used depending on the exact trade. Why haven’t I done it yet? I’m not sure but expect to open one of these trades in the near future…

Different perspective

Of course, in my opinion, determining if a specific stock will outperform the index becomes a difficult decision to make. I would however feel much better about simply taking what I consider to be the most undervalued stock in the stocks that I follow and going long against the index. It will certainly be interesting to see how that goes.

Less volatile

In my opinion, trading against the index would generally be less volatile which overall might be preferable.

Do you have any thoughts on this?

If you liked this post, you can consider subscribing to our free newsletters here

No Comments

No comments yet.

RSS feed for comments on this post.

Sorry, the comment form is closed at this time.