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PairsTrading.net is designed for investors of all levels of skill and
experience, helping them to make consistently profitable trading decisions with
built in stop loss protection measures.
Investing in pairs requires the observation of the price ratio
of the two assets involved, as has been explained previously. Accordingly, the
data that we have leads us to think that this ratio is going to:
-
Rise: we should buy the pair, which means buying the first asset and selling
the second.
-
Fall: we should sell the pair, which means selling the first asset and buying
the second.
The amounts to invest in each of these trades must also be taken
into account. This amount must be calculated such that the nominal amount of
the asset bought is equal to the nominal amount of the asset sold. It should be
noted that by the nominal amount we refer to:
-
In the case of stocks: multiplication of the number of stock by the stock
price.
-
In the case of futures: multiplication of the number of contracts by the
futures price by the contract multiplier.
In the case of MEFF, the multipliers of the contracts are:
-
IBEX-35® Future: 10 €. Therefore an IBEX-35® Futures contract at a price of
11,000 would have a nominal value of
1 (contract) x 11,000 (price) x 10
(multiplier) = 110,000
Thus, an IBEX-35® Futures contract has a nominal value of 110,000 euros.
-
Mini IBEX Future: 1 €. Therefore, a MiniIbex Futures contract with a price of
11,000 would have a nominal value of
1 (contract) x 11,000 (price) x 1
(multiplier) = 11,000
Thus, a MiniIbex Future has a nominal value of 11,000 euros.
-
Single Stock Future: generally speaking, 100 shares per contract . Therefore, a
Futures contract on Telefónica with a price of 12.00 would have a nominal of
1 (contract) x 12.00 (price) x 100
(multiplier) = 1,200
Thus, a Future on Telefónica has a nominal value of 1,200 euros.
Practical example. The BBVA/SAN pair
On 2 March, the BBVA/SAN pair had the following data:
|
Asset
|
Value at close of
02.03.2006
|
|
BBVA
|
16.96
|
|
SAN
|
12.21
|
|
Value of pair
|
1.389
|
As shown in the graph, the BBVA/SAN ratio appears to have a very
cyclical behaviour. Furthermore the pair has a high correlation as shown in the
statistical section, always above 90% in any of the periods:
Supposing we start with a capital of 10,000 euros, we proceed to
sell a pair. We do this by dividing our capital in half, using 5,000 euros for
the sale of BBVA and the other 5,000 euros to buy SAN (remember that this is
the SALE of a pair).
Therefore:
|
Value
|
Capital
|
Stock price
|
Number of shares (capital/price)
|
|
BBVA
|
5,000
|
16.96
|
295
|
|
SAN
|
5,000
|
12.21
|
410
|
-
We sell 295 shares of BBVA at 16.96 euros each, giving us a short nominal
position in BBVA of 16.96 x 295 = 5,003.20 euros.
-
We buy 410 shares of SAN at 12.21 euros each, giving us a long nominal position
in SAN of 12.21 x 410 = 5,006.10 euros.
In the event that instead of using shares we choose to use stock futures, we
would have to make the same calculations to know how many futures to buy or
sell for each stock, taking into account the multiplier of the future.
Generally speaking, as previously noted, the contract size of the stock futures
listed on MEFF is 100, which means that each contract represents the commitment
to buy or sell 100 shares.
Therefore, as the multiplier of the two stock futures involved is 100, we
could:
-
Sell 3 futures on BBVA at 16.96 euros each, giving us a short nominal position
in BBVA futures of 3 x 16.96 x 100 = 5,088.00 euros.
-
Buy 4 futures on SAN at 12.21 euros each, giving us a long nominal position in
SAN futures of 4 x 12.21 x 100 = 4,884.00 euros.
It should also be noted that for buying and selling MEFF futures a margin is
required, which in this case would be 1,495.80 euros in total
On 23 March we find the following graph:
It represents the following data
|
Asset
|
Value at close
on 23.03.2006
|
|
BBVA
|
16.81
|
|
SAN
|
12.15
|
|
Value of pair
|
1.384
|
Continuing with our example, we would then close the position, producing the
following profits and losses:
|
Value
|
Initial price
|
Final price
|
Number of shares
|
Profit and losses
|
|
BBVA
|
16.96
|
16.81
|
295 short
|
44.25 euros
|
|
SAN
|
12.21
|
12.15
|
410 long
|
-24.60 euros
|
|
TOTAL
|
|
|
|
19.65 euros
|
For more information consult the website of MEFF www.meff.com
If the process had been done using futures instead of shares, the result would
have been:
|
Value
|
Initial price
|
Final price
|
Number of futures
|
Profit and losses
|
|
BBVA
|
16.96
|
16.81
|
3 short
|
45.00 euros
|
|
SAN
|
12.21
|
12.15
|
4 long
|
-24.00 euros
|
|
TOTAL
|
|
|
|
21.00 euros
|
The difference arises due to the different number of titles entered in each of
the examples.
List of codes of 114 Spanish stocks, IBEX 35 and 47 non Spanish stocks
|
Name
|
Symbol
|
|
|
|
|
ANTENA 3 TV S.A.
|
A3TV
|
|
ABERTIS
|
ABE
|
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ABENGOA
|
ABG
|
|
ACS
|
ACS
|
|
ACERINOX
|
ACX
|
|
ADOLFO DGUEZ
|
ADZ
|
|
AFIRMA
|
AFR
|
|
AEGON
|
AGN_AM
|
|
AG. BARCELONA
|
AGS
|
|
AHOLD
|
AH_AM
|
|
ALLIED IRISH BANKS
|
AIB_IR
|
|
AIR LIQUIDE
|
AIRL_PA
|
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CORP.FI ALBA
|
ALB
|
|
ALLIANZ AG
|
ALV_XT
|
|
AMPER
|
AMP
|
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ACCIONA
|
ANA
|
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TAVEX ALGODONERA
|
ASA
|
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AVANZIT
|
AVZ
|
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AZKOYEN
|
AZK
|
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BASF
|
BAS_XT
|
|
BAYER A.G.
|
BAY
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BAYER AG
|
BAY_XT
|
|
B.BBV
|
BBVA
|
|
BARON DE LEY
|
BDL
|
|
INBESOS
|
BES
|
|
PULEVA BIOTECH
|
BIO
|
|
B.BANKINTER
|
BKT
|
|
BEFESA
|
BMA
|
|
BOLSA Y MERCADOS ESPA¥OLES
|
BME
|
|
BNP
|
BNPA_PA
|
|
DANONE
|
BSN_PA
|
|
B.BANESTO
|
BTO
|
|
B.VALENCIA
|
BVA
|
|
C.A.F.
|
CAF
|
|
CREDIT AGRICOLE
|
CAGR_PA
|
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CARREFOUR
|
CAR_PA
|
|
CEPSA
|
CEP
|
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TOTAL FINA
|
CFP_PA
|
|
ALCATEL
|
CGE_PA
|
|
GRAL. INVERSIONES
|
CGI
|
|
CORPORACION IB-MEI
|
CIB
|
|
CIE AUTOMOTIVE S.A.
|
CIE
|
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CINTRA S.A.
|
CIN
|
|
CLEOP
|
CLEO
|
|
INM. COLONIAL
|
COL
|
|
CAMPOFRIO
|
CPF
|
|
C.PORTLAND
|
CPL
|
|
DEUTS. BANK
|
DBK_XT
|
|
DAIMLER CHRY
|
DCX_XT
|
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CORPORACION DERMOESTETICA
|
DERM
|
|
VINCI
|
DG_PA
|
|
DOGI
|
DGI
|
|
DINAMIA
|
DIN
|
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DEUTSCHE TEL
|
DUT_XT
|
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EADS
|
EAD
|
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VIVENDI UNIVERSA
|
EAUX_PA
|
|
ERCROS
|
ECR
|
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ENDESA
|
ELE
|
|
ENCE
|
ENC
|
|
ENEL
|
ENEL_MI
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|
ENAGAS
|
ENG
|
|
ENI SPA
|
ENI_MI
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|
ELECNOR
|
ENO
|
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E.ON
|
EOA_XT
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|
EBRO PULEVA
|
EVA
|
|
FAES
|
FAE
|
|
F.C.C.
|
FCC
|
|
FERROVIAL
|
FER
|
|
FORTIS
|
FOR_BE
|
|
FRANCE TELEC
|
FTEO_PA
|
|
FUNESPANA
|
FUN
|
|
GENERALI ASS
|
G_MI
|
|
GENERAL ALQUILER MAQ. -GAM-
|
GALQ
|
|
GAMESA
|
GAM
|
|
GAS NATURAL
|
GAS
|
|
CATALANA OCCIDENTE
|
GCO
|
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GRIFOLS
|
GRF
|
|
B.GUIPUZCOANO
|
GUI
|
|
IBERDROLA
|
IBE
|
|
I IBEX-35
|
IBEX-35
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|
IBERPAPEL
|
IBG
|
|
IBERIA LINEAS AEREAS
|
IBLA
|
|
INDO INTERNACIONAL
|
IDO
|
|
INDRA
|
IDR
|
|
ING GROEP
|
ING_AM
|
|
INYPSA
|
INY
|
|
ITINERE
|
ITI
|
|
INDITEX
|
ITX
|
|
JAZZTEL
|
JAZ
|
|
LAFARGE
|
LAF_PA
|
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LINGOTES ESPECIALES
|
LGT
|
|
C.D.I. LOGISTICA
|
LOG
|
|
LVMH
|
LVMH_PA
|
|
MAPFRE S.A.
|
MAP
|
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MIQUEL Y COSTAS
|
MCM
|
|
DURO FELGUERA
|
MDF
|
|
AXA UAP
|
MIDI_PA
|
|
MECALUX
|
MLX
|
|
MONTEBALITO
|
MTB
|
|
MARTINSA-FADESA
|
MTF
|
|
MITTAL STEEL
|
MTS
|
|
MUENCHENER
|
MUV2_XT
|
|
INM. METROVACESA
|
MVC
|
|
NATRA
|
NAT
|
|
NICOLAS CORREA
|
NEA
|
|
HOTELES NHH
|
NHH
|
|
NOKIA
|
NOK_HL
|
|
NATRACEUTICAL S.A.
|
NTC
|
|
OBRASCON
|
OHL
|
|
L'OREAL
|
OREA_PA
|
|
EUROPAC
|
PAC
|
|
B.PASTOR
|
PAS
|
|
PHILIPS
|
PHI_AM
|
|
B.POPULAR
|
POP
|
|
PRIM S.A
|
PRM
|
|
PRISA
|
PRS
|
|
PROSEGUR
|
PSG
|
|
PARQUESOL
|
PSL
|
|
PESCANOVA
|
PVA
|
|
RENO DE MEDICI
|
RDM
|
|
RED ELECTRICA
|
REE
|
|
RENTA CORPORACION
|
REN
|
|
REPSOL
|
REP
|
|
BODEGAS RIOJANAS
|
RIO
|
|
RENAULT
|
RN_PA
|
|
RWE
|
RWE_XT
|
|
BANCO SABADELL
|
SAB
|
|
B. BSCH
|
SAN
|
|
SANOFI SYNTH
|
SANO_PA
|
|
SAP
|
SAP_XT
|
|
SEDA DE BARNA
|
SED
|
|
SOCIETE GRAL
|
SG_PA
|
|
SOGECABLE
|
SGC
|
|
SAINT GOBAINT
|
SGOB_PA
|
|
SIEMENS AG
|
SIE_XT
|
|
SUEZ LY. EAUX
|
SLEE_PA
|
|
SNIACE
|
SNC
|
|
SOL MELIA
|
SOL
|
|
SOS ARANA
|
SOS
|
|
INTESA SAN PAOLO
|
SPI_MI
|
|
SERVICE POINT SOLUTION
|
SPS
|
|
SCHNEIDER ELECTRIC
|
SU_PA
|
|
SACYR VALLEHERMOSO
|
SYV
|
|
TELEFONICA
|
TEF
|
|
TELECOM ITALIA
|
TI_MI
|
|
GESTEVISION TELECINCO S.A
|
TL5
|
|
TECNICAS REUNIDAS S.A.
|
TRE
|
|
TUBOS REUNIDOS S.A.
|
TRG
|
|
TUBACEX
|
TUB
|
|
URBAS
|
UBS
|
|
UNICRED. ITA
|
UC_MI
|
|
UNILEVER
|
UN_AM
|
|
UNION FENOSA
|
UNF
|
|
UNIPAPEL
|
UPL
|
|
URALITA
|
URA
|
|
VIDRALA
|
VID
|
|
VISCOFAN
|
VIS
|
|
VUELING AIRLINES
|
VLG
|
|
VOCENTRO S.A.
|
VOC
|
|
ZELTIA
|
ZEL
|
|
ESP. ZINC
|
ZNC
|
|
ZARDOYA OTIS
|
ZOT
|
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