# Is there an arb opportunity in the GLD/SLV Spread?



## CanOz (21 April 2013)

Thanks to Joules for posting on another forum, interested in others opinion here...I think TH mentioned that Silver copped it worse than Gold recently...





> http://seekingalpha.com/instablog/81...read-arbitrage
> 
> http://www.marketoracle.co.uk/Article5985.html
> 
> http://www.investopedia.com/articles...ver-ration.asp






> Spread = (GLD*.18)-SLV
> 
> Spread = (134.3*.18)-22.4
> 
> ...





CanOz


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## skc (21 April 2013)

CanOz said:


> Thanks to Joules for posting on another forum, interested in others opinion here...I think TH mentioned that Silver copped it worse than Gold recently...




Without looking at the actual stats...There's probably good correlation but not exactly cointegration.

The key to trading any spread is, like all trades, rsk management.

I remember reading something by the silver bugs who claimed that silver was undervalued on gold-silver ratio... probably when silver was $50/oz.

If the spread keeps blowing out - where do you give up?


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## sinner (22 April 2013)

Hello,

Depends on how you define "arb"?

If we are talking about "arb"ing the short term returns of the GLD/SLV spread by betting on its mean reversion (which I assume you are), then yes, just as much as there is in any spread or asset.

However, "good" spreads tend to have a low ratio of momentum to volatility. GLD/SLV has a very high ratio of momentum to volatility, at least according to the indicator I use! I look for ratios less than ~1.5, as you can see on the chart the indicator I use never goes below 1.8ish, much better opportunities in short term follow through than short term mean reversion!




EDIT: Technical terms. A spread is actually ASSET_1 MINUS ASSET_2, I generally trade the pair, which is ASSET_1 DIVIDEDBY ASSET_2. FYI. The chart above is a spread.


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## sinner (22 April 2013)

I just plotted the pair rather than the spread in R (how I'd trade it), the numbers look (significantly) even worse.


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## CanOz (22 April 2013)

Thanks SKC and Sinner...question answered, case closed...better spread trades elsewhere!


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## sinner (22 April 2013)

CanOz said:


> Thanks SKC and Sinner...question answered, case closed...better spreads trade elsewhere!




You know that there is no rule dictating you must bet on short term mean reversion right? Above 1.6-1.7, betting on short term follow through is usually a good trade IMHO, especially on a transaction cost/turnover basis.

Everyone thinks short term returns mean revert, but this is only the case if you're testing indices post 1990s-ish, prior to that most assets appear to be inclined to followthrough.

Spreading is a good technique to reduce equity curve volatility compared to the underlying. It's not about MR. MR is about MR.  If that makes any sense.

Volatility regime filter > 1.6: Trade long the pair only if the pair is > 200SMA of highs. Trade short the pair only if the pair is < 200 SMA of lows.
Volatility regime filter < 1.5: Trade short the pair if STDEV of short term returns > 1 STDEV + avg of short term returns, trade short the pair if STDEV of short term returns < 1 STDEV - avg of short term returns.
Volatility regime filter <1.6 AND > 1.5: Nothing.

Simplified slightly, but works good for me.


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## FlyingFox (23 April 2013)

sinner said:


> I just plotted the pair rather than the spread in R (how I'd trade it), the numbers look (significantly) even worse.
> 
> View attachment 51884




Didn't think anyone used R, for trading anyway ... good to see.


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## sinner (23 April 2013)

FlyingFox said:


> Didn't think anyone used R, for trading anyway ... good to see.




http://systematicinvestor.wordpress.com/
http://timelyportfolio.blogspot.com.au/

Plenty out there...I use quantmod, a good tool.


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## FlyingFox (23 April 2013)

sinner said:


> http://systematicinvestor.wordpress.com/
> http://timelyportfolio.blogspot.com.au/
> 
> Plenty out there...I use quantmod, a good tool.




Thanks. I should have qualified that with I didn't think any one on ASF used R. I have seen t being used heavily for quantitative finance.


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