Pairs trading calculations

[schoe]

If I want to short one stock and go long another at the same time how do I work out how many pounds per point (spreadbetting) per share in order to get the closest possible hedge?
Thanks in advance to any mathematicians!

 

[FTSE Beater]

Hi Schoe

Stock A Price times by Stock A £/PerPoint divide by Stock B price

So If stock A is 100 @ a bet of £1 per point and Stock B is 50.

100x1 = 100 / 50 = £2 per point

HTH 🙂

 

[schoe]

It does help Mark thanks for the quick reply. I have a plan!

 

[FTSE Beater]

Hi Schoe

A Plan 😱
Should we be worried 😉

 

[frugi]

This might be a reasonable proposition for a long term pairs trade as I think Lloyds is likely at some point to come back into favour at Barclays' expense.

Ideally Sierra would start both stocks off at 0% and then have percentage change on the right hand Y axis (like BigCharts) but I don't think I can make it do this.

It just so happens in this case that the prices start off close enough to each other to make the extrapolation to today valid (I hope). But on some charts they start miles apart which makes meaningful analysis impossible. The ratio and difference studies all seem to work on points not percentages as well, tis most annoying.