ASX Stock Pairs Trade Journal

[skyQuake]

SKE has reported today and hasn't thrown a foul ball, which eliminates another risk of the takeover. They have declared a 9.5c div and then another 15.5c special div if T/O proceeds. Buying before 24th August (not forgetting this date again!) gives holders access to some solid franking credits taking the total proceeds to ~35.7c.
At current prices the arb looks very good now, especially factoring in franking. Too bad PRG is so hard to borrow!
I've had a position on for a while (missed a few exits), but haven't been able to actively trade it due to the issue of re-borrowing PRG becoming unavailable.

Skilled Shareholders to receive:
PRG ($2.50 x 0.55) + $0.357 = ~$1.73.

Current situation with full franking benefit assumed:
SKE $1.58 / $1.73 = 8.7% discount, ~2 months to completion.

Current situation without franking:
SKE $1.58 / $1.625= 2.85% discount, ~2 months to completion.

Can still get PRG borrow with IG: 500k @ 3.5%

 

[skc]

Can still get PRG borrow with IG: 500k @ 3.5%

But then you going to need real $cash to buy the SKE leg to benefit from the franking...

 

[skyQuake]

Interestingly enough, IG doesn't make you pay (or receive) franking credits.
So in theory you can long stock, short via IG for some free credits...

p.s. don't tell the ATO

 

[skc]

Interestingly enough, IG doesn't make you pay (or receive) franking credits.
So in theory you can long stock, short via IG for some free credits...

p.s. don't tell the ATO

The 45-day rule states that investors must hold the stock "at risk" for 45 days to qualify for franking credits. I'd argue shorting equivalent in CFD would not be "at risk" but I am happy to be informed otherwise.

This means that you must continuously own shares ‘at risk’ for at least 45 days (90 days for certain preference shares) not counting the day of acquisition or disposal, to be eligible for any franking tax offset.

Days on which you have 30% or less of the ordinary financial risks of loss and opportunities for gain from owning the shares cannot be counted in determining whether you hold the shares for the required period.

The financial risk of owning shares may be reduced through arrangements such as hedges, options and futures.

https://www.ato.gov.au/Individuals/...ications/You-and-your-shares-2013-14/?page=11

Reading the above, may be you can hedge 70%?

 

[SilverRanger]

The 45-day rule states that investors must hold the stock "at risk" for 45 days to qualify for franking credits. I'd argue shorting equivalent in CFD would not be "at risk" but I am happy to be informed otherwise.



https://www.ato.gov.au/Individuals/...ications/You-and-your-shares-2013-14/?page=11

Reading the above, may be you can hedge 70%?

30% in 45 days could still be a lot. What about you short, and your wife/mum/dad/dog long?

 

[skc]

I guess what you actually do is this....

Say you are holding $30k ANZ shares as a buy-and-hold parcel. You buy another $70k shares (or approx 2150 shares) and hedge $70k in CFDs. You satisfy the ATO rule for 30% exposure, which is at no additional risk to your original buy and hold.

With the ANZ 86c dividend you get 37c franking credit per share. So that's free franking of $795.

Total transaction is 4x$70k = $280k. Say you pay 8 points, that's $224 in commission.

So all in all, this exercise delivers a profit of $795 - $224 = $571. Or <1% of the capital employed, over 45 days. And it's merely ~$270 more than what you'd earn in a bank @ 3.5%.

So I think it's not a viable strategy at all (and probably disliked by the ATO).

30% in 45 days could still be a lot. What about you short, and your wife/mum/dad/dog long?

I'd hate to have my dog answering an ATO audit.

 

[VSntchr]

SKE/PRG closed nicely this afternoon

In fact it has had a few nice closes in the last week or so. Managed to scrape in a few trades..although it is pretty hard to whack it with a decent amount due to the chunky nature that PRG moves in and considering the target is ~1.5-2.0% at best. Takes a bit of timing and rag to draw away the sweat pouring from one's brow when the matching price is flicking around at 4:09pm

 

[skc]

SKE/PRG closed nicely this afternoon

In fact it has had a few nice closes in the last week or so. Managed to scrape in a few trades..although it is pretty hard to whack it with a decent amount due to the chunky nature that PRG moves in and considering the target is ~1.5-2.0% at best. Takes a bit of timing and rag to draw away the sweat pouring from one's brow when the matching price is flicking around at 4:09pm

So much volatility and not just report related... I wish I am pairs trading!

 

[VSntchr]

So much volatility and not just report related... I wish I am pairs trading!

Well, it feels like forever - but its only been a few weeks, and it's time to rev up the pairs trading again.
I am using this week to recalibrate the saved pairs and do a bit of database management. This was somewhat forced on me as I upgraded my IT over the break (old setup was getting quite slow). The new i7 core and 8gb ram seems to run backtests a little quicker which is nice.

I noted last year that I jumped back into pairs a little too soon after reporting season, so this year I will be starting off at very tiny size and build my way up to full size once I get some confidence and evidence that it is appropriate to do so. Another reason for this is that the trading environment has altered significantly since we paused pairs - so it is probably a good idea to get the hang of increased volatility with small size first.

Hopefully this volatility sticks around and we can achieve some wider targets for a few weeks!

 

[sinner]

Well, it feels like forever - but its only been a few weeks, and it's time to rev up the pairs trading again.
I am using this week to recalibrate the saved pairs and do a bit of database management. This was somewhat forced on me as I upgraded my IT over the break (old setup was getting quite slow). The new i7 core and 8gb ram seems to run backtests a little quicker which is nice.

I noted last year that I jumped back into pairs a little too soon after reporting season, so this year I will be starting off at very tiny size and build my way up to full size once I get some confidence and evidence that it is appropriate to do so. Another reason for this is that the trading environment has altered significantly since we paused pairs - so it is probably a good idea to get the hang of increased volatility with small size first.

Hopefully this volatility sticks around and we can achieve some wider targets for a few weeks!

Isn't there still a month of reporting season?

http://www.asx.com.au/documents/research/company_reporting_dates_2015.pdf

 

[VSntchr]

Isn't there still a month of reporting season?

http://www.asx.com.au/documents/research/company_reporting_dates_2015.pdf

Most of the stocks I trade reported in early-mid August. I don't really pair up the miners too often.

 

[skc]

Well, it feels like forever - but its only been a few weeks, and it's time to rev up the pairs trading again.
I am using this week to recalibrate the saved pairs and do a bit of database management. This was somewhat forced on me as I upgraded my IT over the break (old setup was getting quite slow). The new i7 core and 8gb ram seems to run backtests a little quicker which is nice.

I noted last year that I jumped back into pairs a little too soon after reporting season, so this year I will be starting off at very tiny size and build my way up to full size once I get some confidence and evidence that it is appropriate to do so. Another reason for this is that the trading environment has altered significantly since we paused pairs - so it is probably a good idea to get the hang of increased volatility with small size first.

Hopefully this volatility sticks around and we can achieve some wider targets for a few weeks!

Lol. I echo every single point you've made. I even upgraded my computer over the break too!

It's hard to resist the temptation of jumping back in too quickly... in fact, I think from now on I will actually trade the reporting season, and take the first 2 weeks afterwards off.

 

[VSntchr]

It's hard to resist the temptation of jumping back in too quickly... in fact, I think from now on I will actually trade the reporting season, and take the first 2 weeks afterwards off.

Interesting SKC, what's prompting the change of approach?

I even upgraded my computer over the break too!

What did you go for? I'm still running Win8, perhaps I'll give 10 another go soon (free upgrade)..I was just put off by my horrible experience last time. I'v upgraded processesor from i5 to i7 and doubled the ram to 8gb. Was considering a solid state hard drive also, but decided I can add that later - maybe when the PC starts to run slow in about 12-18 months :

My old machine was only 22 months old - I didn't feel like it was due to die yet....I guess slamming it hard over a couple of screens for 8-12 hours a day everyday is a bit more demanding than regular use. Will be good to keep as a backup, especially as it has all the relevant software and documents on it and ready to go.

 

[skc]

Interesting SKC, what's prompting the change of approach?

1. Taking break during the actual reporting season is difficult. I need to read the reports etc so I build my knowledge of the companies that I am going to trade. It'd be a mammoth task to take 2 weeks off and try to catch up reading the reports and analysis of hundreds of companies.

2. Reporting season offers good directional trading opportunities.

3. Pairs trading is relatively quiet in the 2 weeks after reporting season, as most signals are generated by market response to the reports. So avoid trading these period is probably prudent.

4. The few weeks after reporting is also a busy ex-div period which makes pairs trading trickier.

 

[skc]

Interesting SKC, what's prompting the change of approach?


What did you go for? I'm still running Win8, perhaps I'll give 10 another go soon (free upgrade)..I was just put off by my horrible experience last time. I'v upgraded processesor from i5 to i7 and doubled the ram to 8gb. Was considering a solid state hard drive also, but decided I can add that later - maybe when the PC starts to run slow in about 12-18 months :

My old machine was only 22 months old - I didn't feel like it was due to die yet....I guess slamming it hard over a couple of screens for 8-12 hours a day everyday is a bit more demanding than regular use. Will be good to keep as a backup, especially as it has all the relevant software and documents on it and ready to go.

My previous computer lasted me almost 5 years. It still worked OK but took a bit to boot up and can get a bit slow towards the end of the day (just like me). But what prompted the change was 3 BSOD in a year... so I couldn't trust it anymore.

I went with a i5, a higher end case, 16GB ram, Win7 (I hated Win8 and not ready for Win10), and a 520GB SSD.
SSD is what you should have invested in. It will make a tonne of difference. My boot up time is <15 seconds. I am hoping this system will last another 5 years.

I chose to invest a bit more upfront for a longer lasting rig... I hate the trouble of switching and of getting rid of the old system.

I also bought a 42in UHD recently. So far I am not loving it. But I will write about it more in the other thread where I asked about it.

 

[edman79]

I went with a i5, a higher end case, 16GB ram, Win7 (I hated Win8 and not ready for Win10), and a 520GB SSD.
SSD is what you should have invested in. It will make a tonne of difference. My boot up time is <15 seconds. I am hoping this system will last another 5 years.

SSD Makes a HUGE difference. If you need loads of storage just run your operating system off a small SSD and add a 2nd hard drive for the storage.

 

[VSntchr]

SSD Makes a HUGE difference. If you need loads of storage just run your operating system off a small SSD and add a 2nd hard drive for the storage.

Sounds like a good idea.
I have heard some SSD have a short lifespan..I think I will opt for something with good reviews like the recent Samsung ones.

Happy pairs trading guys!! Ive been pretty slow with opening trades as there hasn't been too many favourable signals for me...although this week has started to get a bit better.
It looks as if GMG might be finally starting to come back into reality a little bit, the yield has been much smaller than every other REIT for a while now - and finally their is some big divergences going on with GMG breaking out of the ratio range.

 

[skc]

Happy pairs trading guys!! Ive been pretty slow with opening trades as there hasn't been too many favourable signals for me...although this week has started to get a bit better.

Just waiting for the Fed meeting to finish up and I'd be fully back into pairs. I am expecting increased volatility immediately afterwards so keeping my powder dry for a few more days. I have however put on a few pairs at tiny sizes so I can keep a close watch on them.

FWIW... there'd be chaos if Fed doesn't raise imo. And we'd probably rally off a rate hike (at least a relief rally for half a week).

 

[VSntchr]

Just waiting for the Fed meeting to finish up and I'd be fully back into pairs. I am expecting increased volatility immediately afterwards so keeping my powder dry for a few more days. I have however put on a few pairs at tiny sizes so I can keep a close watch on them.

FWIW... there'd be chaos if Fed doesn't raise imo. And we'd probably rally off a rate hike (at least a relief rally for half a week).

Good discipline there mate.

I've been taking 1,2 or 3% leg-size based on my confidence of the pair..it's actually quite a good experience. It had allowed me to form trading discipline and get in the habit of making those hard choices when there is less $$ on the line. For example; if one leg gets filled and the other leg looks like it might step away from you...but your getting close to being hit at limit...normally I'd feel tempted to try and let it get hit, but with these smaller sizes I've been avoiding mucking around and just hitting the market once one leg gets filled. Makes for less stress and allows you to move on to the next trade without spending time "hoping".

Markets really slow today...probably an indication of tomorrow aswell as everyone just waits...

 

[skc]

Good discipline there mate.

I've been taking 1,2 or 3% leg-size based on my confidence of the pair..it's actually quite a good experience. It had allowed me to form trading discipline and get in the habit of making those hard choices when there is less $$ on the line. For example; if one leg gets filled and the other leg looks like it might step away from you...but your getting close to being hit at limit...normally I'd feel tempted to try and let it get hit, but with these smaller sizes I've been avoiding mucking around and just hitting the market once one leg gets filled. Makes for less stress and allows you to move on to the next trade without spending time "hoping".

When I have my "portfolio" of pairs I am pretty much micro trading the various legs all day. Providing liquidity vs consuming liquidity probably explains a lot of the P&L if I were to really analyse the P&L.

BTW, what do you mean 1, 2 or 3%?

Markets really slow today...probably an indication of tomorrow aswell as everyone just waits...

It's up 80 pts so not that slow... but I am struggling to understand the strength. I read something like the average trader on Wall Street has only 5 years experience and never faced a rate rise... makes you question whether the "market" actually knows anything!