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Pastimes : QQQ & DIA - chat & chart
QQQ 608.86+0.1%Nov 14 4:00 PM EST
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To: Jon Khymn who wrote (87)5/1/2001 5:23:21 PM
From: the-phoenix  Read Replies (1) of 795
 
>>Would love to learn more about XLK & QQQ arbitration...<<

For that you may need to go to law school. As for arbitrage... :-)

Arb trade is underwater after one day. XLK priced at .614 QQQ at the close today, which is (hopefully) at a near term extreme. Should come back to more like .63 to .64 in the next day or so. In the meantime, all my capital tied up in this trade while the market decides to reverse back up again. Rats.

Here is a chart of the XLK/QQQ relative price with a 20 day ema overlay:

stockcharts.com[l,a]dhcaynmy[db][pc10!c20!b50][iLj[qqq]]

I use a 30 day sma and trade based on normalized deviations from this mean. Normalized deltas in excess of 2 standard deviations are rare and tend to correct quickly. Yesterday exceeded 2, but today closed at 3.27 standard deviations, which is a heck of a spike in the ratio, indicating XLK way undervalued here, relative to QQQ. Success rate for this kind of a trade is about 80%, but may take 5-6 days sometimes to play out. At that point, the opportunity cost is pretty high, given how much capital gets tied up in an arbitrage play to make it worthwhile, after slippage and commissions. (Assuming other potentially profitable trades were missed in the interim.)

Will keep you posted on how this plays out.

Phoenix
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