WDIS: Two Yutes - Beginner Options Trading - April 12, 2021 - Digging Deeper into Pairs Trades

published 1 month ago by tastytrade, Inc.

Tom explains that when you trade futures, it’s a black or white trade similar to stocks--you either want the underlying to go up, or down. Not quite the nuance you get with options. So in order to use strategy when trading futures, you put on pairs trades. A pairs trade is a bet on the relationship, or spread, of two underlyings. It can act as a hedge against risk, and it can buy you more time to be right. As an example, you may buy the Nasdaq and sell the S&P 500. They’re highly correlated but they move a little bit differently. The yutes finally get a chance to put on some pairs trades of their own:E goes bullish on gold/silver and buys the Smalls precious metals product (/SPRE), and sells the Smalls US dollar product (/SFX) against it.Kay steps out of the box, and does a stock pairs trade, buying $500 worth of shares of Coke, and selling the same in Pepsi. Tom explains that futures trades are more capital efficient--they require less capital than a stock trade with the same notional value--so E has tied up less of his capital than Kay has. This is why most folks don’t do pairs trades with stocks.

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