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Strategies & Market Trends : Margin Calls - Share The Pain -- Ignore unavailable to you. Want to Upgrade?

To: daffodil who wrote (127)	12/10/2000 11:23:33 AM
From: Mama Bear	Read Replies (1) \| Respond to of 158

"What's a paired trade? " A paired trade is going long and short two related securities. An example of one I did earlier this year was to go long COMS and short PALM in anticipation of the PALM distribution. Another that some like is to go long a closed end country specific mutual that trades at a discount and short the WEBS for the same country. If the discount on the fund narrows the trade is successful. One that I'm considering now is long EXTR and short CSCO. Since I believe EXTR will grow at a faster rate than CSCO it makes sense. Yes, I could lose money on the CSCO short, but would expect to make more on the EXTR long. If the market dives and EXTR goes down, CSCO would also likely fall cushioning the blow. Of course in the best possible world EXTR rises and CSCO implodes, but that's not the goal. Now if I could only get a short rebate I might start doing more pairs. Maybe someday I'll be that rich. Regards, Barb

To: daffodil who wrote (127)	12/11/2000 6:32:28 PM
From: LPS5	Read Replies (1) \| Respond to of 158

The trading of equity pairs are one example of a strategy called relative value trading, generally more common in the fixed income world than elsewhere. Arbitrageurs go long one a particular issue while shorting another, sometimes of the different maturities (10-yr vs. 30-yr); sometimes of different qualities (Aaa vs. Aa); and sometimes of different types (10 yr corporate vs. 10 yr Treasury), to bet on the changing shape of a particular yield curve or the convergence/divergence (to specific, historically recurring basis point spreads) between several yield curves. In the mainstream, these are usually safe bets, especially when paired, to use a bad pun, with stops and proper risk management. But when one or both legs of the trade are in illiquid issues - and particularly if, as in the case of some hedge funds, the position(s) are leveraged - sometimes the very act of unwinding a relative value trade that begins to move against the trader can accelerate both the speed and degree of what is euphemistically called "adverse selection." It is for this reason that the highly exotic relative value trades executed by Long Term Capital Management prior to its' 1998 collapse were likened to "picking up nickels in front of a bulldozer." LPS5