Author Topic: Earnings and more...  (Read 4780 times)

Paul Jessup

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Earnings and more...
« on: January 11, 2015, 03:22:17 pm »
1. When trading the pair, doesyour program automatically pick which stock is long, and which one short?
2. Do you think that those with earnings in the past and future 14 days should be filtered out?
3. Is it possible to alter the size of the stock purchase to fit the contract size? For example, 2 pplt contracts of (platinum) are about equal to 1 gc (gold) contract.

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Re: Earnings and more...
« Reply #1 on: January 11, 2015, 04:09:03 pm »
1. When trading the pair, doesyour program automatically pick which stock is long, and which one short?
2. Do you think that those with earnings in the past and future 14 days should be filtered out?
3. Is it possible to alter the size of the stock purchase to fit the contract size? For example, 2 pplt contracts of (platinum) are about equal to 1 gc (gold) contract.

  • Yes, it does.
  • This was discussed here few times already. I know some professional traders who tried both options (filter earnings vs ignore earnings). Results were not too different. Problem with filtering earnings is that usually you filter out too much - also good trades. Also, sometimes you can gain with earnings causing moves in your opened direction. In future, we will probably offer earnings filters, so our clients can choose, but there is no estimate yet.
  • Right now we just split the position margin into equal halves (beta=1). We are already working on model which can work with a different beta (check the Kalman model). About your question - would you like to be able to set a fixed beta for your pair? Also please mind that our platform does not support trading futures/commodities. We only support stocks and ETFs.

Paul Jessup

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Re: Earnings and more...
« Reply #2 on: February 03, 2015, 01:55:23 pm »
Hello and thanks again for your answers.

  • Yes, it does.
  • This was discussed here few times already. I know some professional traders who tried both options (filter earnings vs ignore earnings). Results were not too different. Problem with filtering earnings is that usually you filter out too much - also good trades. Also, sometimes you can gain with earnings causing moves in your opened direction. In future, we will probably offer earnings filters, so our clients can choose, but there is no estimate yet.
  • Right now we just split the position margin into equal halves (beta=1). We are already working on model which can work with a different beta (check the Kalman model). About your question - would you like to be able to set a fixed beta for your pair? Also please mind that our platform does not support trading futures/commodities. We only support stocks and ETFs.

1. Could you please tell me where the system points out which underlying is long?
2. That answers my question completely.
3. OK - 1 Visa to 3 Mastercard contracts, for example. That would be very interesting. Glad to read that you are thinking of adding this.

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Re: Earnings and more...
« Reply #3 on: February 05, 2015, 09:44:07 am »
ad 1)
The system (pairs trading model) decides automatically when to open long pair position (leg #1 long, leg #2 short) or short pair position (leg #1 short, leg #2 long). Details are here: https://wiki.pairtradinglab.com/wiki/Pair_Trading_Models

ad 3)
I want to be more specific here and I will provide an example. Right now, while opening pair position, the system takes the margin for the pair position and splits it in equal halves. Then, for each half it buys as many stocks as possible. This is determined by current instrument price only.
Example with Visa and Mastercard:
https://www.pairtradinglab.com/backtests/VNN_VV007C2o1XI7

2014-06-17   NYSE:V   Sell   210.81   2.314   1   23
2014-06-17   NYSE:MA   Buy   74.98   2.314   1   66

When you take a look on the first trade, you can see it opened 23 shares of Visa vs 66 shares of Mastercard. So it already does the balancing you mentioned (1 Visa to 3 Mastercard) automatically - based on trading price of both instruments.
You can also make this decision based on a different indicator, like beta. Then it uses estimate beta to do the balancing, instead of just using the open prices. This can go to slightly different results - depends on actual difference between estimated beta and ratio of prices.
So actually, when using different ratio than the ratio of prices for weighting both positions, you are introducing some additional bias to your pair trade. I will think about introducing the possibility of having fixed custom weighting in the backtester. But I think this is something for advanced pair traders.


Hello and thanks again for your answers.

1. Could you please tell me where the system points out which underlying is long?
2. That answers my question completely.
3. OK - 1 Visa to 3 Mastercard contracts, for example. That would be very interesting. Glad to read that you are thinking of adding this.