The Nature of Pair Stock Trading History

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In financea pairs trading with options and futures contracts trade also known as relative value trade is the simultaneous purchase of one security and sale of a related security, called legsas a unit.

Spread trades are usually executed with options or futures contracts as the legs, but other securities are sometimes used. They are executed to yield an overall net position whose value, called the spreaddepends on the difference between the prices of the legs. Common spreads are priced and traded as a unit on futures exchanges rather than as individual legs, thus ensuring simultaneous execution and eliminating the execution risk of one leg executing but the other failing.

Spread trades are executed to attempt to pairs trading with options and futures contracts from the widening or narrowing of the spread, rather than pairs trading with options and futures contracts movement in the prices of the legs directly. The volatility of the spread is typically much lower than the volatility of the individual legs, since a change in the market fundamentals of a commodity will tend to affect both legs similarly.

The margin requirement for a futures spread trade pairs trading with options and futures contracts therefore usually less than the sum of the margin requirements for the two individual futures contracts, and sometimes even less than the requirement for one contract. Calendar spreads are executed with legs differing only in delivery date. They price the market expectation of supply and demand at one point in time relative to another point.

A common use of the calendar spread is to "roll over" an expiring position into the future. When a futures contract expires, its seller is nominally obliged to physically deliver some quantity of the underlying commodity to the purchaser. In practice, this is almost never done; it is far more convenient for both buyers and sellers to settle the trade financially rather than arrange for physical delivery.

This is most commonly done by entering into an offsetting position in the market. For example, someone who has sold a futures contract can effectively cancel the position out by purchasing an identical futures contract, and vice versa. The contract expiry date is fixed at purchase. If a trader wishes to hold a position in the commodity beyond the expiration date, the contract can be "rolled over" via a spread trade, neutralizing the soon to expire position while simultaneously opening a new position that expires later.

Intercommodity spreads are formed from two distinct but related commodities, reflecting the economic relationship between them. Option spreads are formed with different option contracts on the same underlying stock or commodity. There are many different types of named option spreads, each pricing a different abstract aspect of the price of the underlying, leading to complex arbitrage attempts.

Not to be confused with Swap spreadsIRS Spread trades are formed with legs in different currencies but the same or similar maturities. Two notable examples, U. Dirham and Saudi Riyal interest rate swaps, are quoted in the inter-bank market as spreads to US dollar interest rate swaps. From Wikipedia, the free encyclopedia. Bucket shop stock market Contract for difference Forex Financial betting Spread betting. Retrieved from " https: All articles with unsourced statements Articles with unsourced statements from June Pages using div col with deprecated parameters.

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How are Stock Futures different from Stock Options? In stock options, the option buyer has the right and not the obligation, to buy or sell the underlying share. Risk-return profile is symmetric in case of single stock futures whereas in case of stock options payoff is asymmetric. Also, the price of stock futures is affected mainly by the prices of the underlying stock whereas in case of stock options, volatility of the underlying stock affect the price along with the prices of the underlying stock.

What are Stock Futures? How are Stock Futures priced? What are the opportunities offered by Stock Futures? How are Stock Futures settled? Can I square up my position? When am I required to pay initial margin to my broker? Do I have to pay mark-to-market margin? What are the profits and losses in case of a Stock Futures position? What is the market lot for Stock Futures? Why are the market lots different for different stocks? What are the different contract months available for trading?

What is spread trading on BSE? As an investor, how do I start trading in Stock Futures? What securities can I submit to the broker as collateral? How does an investor, who has the underlying stock, use Stock Futures when he anticipates a short-term fall in stock price?

How can an investor benefit from a predicted rise or predicted fall in the price of a stock? What is pair trading?