Is Pair Trading Strategy really effective?
Step 1: Identify two assets. Step 2: Choose one to go long, and the other one to go short.
Tesla: short; Twitter: long
Step 3: Provide detailed explanations for your choices.
In January 2022, rumour was running wild that Elon Musk, CEO of Tesla, was buying in Twitter share and wanted to buy the company. There was also fear that he might be selling Tesla's share to do so. The rumour became true. While Twitter share price rose to a high point, Tesla's plunged to its lowest. Hence it made sense shorting Tesla and taking long position on Twitter. Although the acquisition ended on October 2022, Elon Musk continued to sell Tesla's share to cover Twitter's losses til December 2022. The saga ended Tesla's share price hit historical low USD 101.81 in January 2023 and Twitter bought at USD 54.20 per share and became privately owned company.
Tesla: short; Twitter: long
Step 3: Provide detailed explanations for your choices.
In January 2022, rumour was running wild that Elon Musk, CEO of Tesla, was buying in Twitter share and wanted to buy the company. There was also fear that he might be selling Tesla's share to do so. The rumour became true. While Twitter share price rose to a high point, Tesla's plunged to its lowest. Hence it made sense shorting Tesla and taking long position on Twitter. Although the acquisition ended on October 2022, Elon Musk continued to sell Tesla's share to cover Twitter's losses til December 2022. The saga ended Tesla's share price hit historical low USD 101.81 in January 2023 and Twitter bought at USD 54.20 per share and became privately owned company.
Limitation of Pair Trading Strategy (PTS)
PTS is based on past data and may not be able to replicate into future investment. In the above example, I didn't really short Tesla and long on Twitter. This was because the share price of Tesla and Twitter fluctuated as the acquisition was not smooth sailing. At one point, Elon Musk reversed it's decision and Twitter share price crashed more than 10%. Not many will be able to use PTS to make profit unless you can manage your fear (panic sell) and greed (FOMO). I found a website which gives some good examples of PTS and explanation.
PTS is based on past data and may not be able to replicate into future investment. In the above example, I didn't really short Tesla and long on Twitter. This was because the share price of Tesla and Twitter fluctuated as the acquisition was not smooth sailing. At one point, Elon Musk reversed it's decision and Twitter share price crashed more than 10%. Not many will be able to use PTS to make profit unless you can manage your fear (panic sell) and greed (FOMO). I found a website which gives some good examples of PTS and explanation.
Source:
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I reflected trading experiences by writing journals. My comments are for educational purposes not financial advice.
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72734102 : Are you kidding? Tesla is LONG and then Longer! It’s a monster money maker! It’s WAY more than just EV Market!
ZnWCOP 72734102: The above example is a hypothetical example to show that PTS has its limitation. If you read further, I didn't short Tesla share.