Q&A
Since You Asked
| Confused about some aspect of trading? Professional
trader Don Bright of Bright Trading (www.stocktrading.com), an equity trading
corporation, answers a few of your questions. |
Don Bright of Bright Trading |
PROGRAM TRADING
I just started daytrading NYSE stocks. I would like to know more
about program trading and how it can have an effect on my trading the Dow
30 or Standard & Poor's 500. Is there any way I can know or track which
stocks are being hit by program trading at a given moment? If you know
any websites or books where I can learn more about taking advantage of
program trading, please let me know.--Jim
I go to www.programtrading.com every day to see their fair value calculations
and buy and sell programs. I have mentioned them before in STOCKS &
COMMODITIES, and still think they are a good resource.
MINIMIZING RISK WITH PAIRS
When selecting a portfolio of pairs to minimize market risk, what
tools do you use to minimize or diversify away the specific risk? Do you
use any aspects from the capital asset pricing model (CAPM) or arbitrage
pricing theory (APT)? --Alex
Excellent question. Since correlated pairs trading has been much more
lucrative to those who do their homework, we have done our best to cover
most of the bases when determining which specific pairs (of stocks) to
trade. The CAPM comes into play, almost inadvertently, since we use "systematic
risk" (beta) and "specific risk" (valuations such as price to book) in
our analysis. The alternative pricing method of APT comes into play more
along the lines of our historical data and spread ranges. As in most working
strategies, we cannot limit ourselves to a few criteria.
Exhaustive research into each company's history, new items, take-over
bids, and relationship to both the overall market and its peers is required
before starting to trade any single pair. We assign a bias to each pair,
based primarily on fundamentals, and trade the pair from the long side
with that bias. After thorough fundamental and historical research, we
look at pricing ranges, adjusted for capitalization, to determine our incremental
entry and exit points.A good place to look for more pairs information is:
www.pairtrader.com.
SERIES TICKER IN SPLITS
Quick options question: When a stock splits (not 2 for 1 or 1 for
2, but maybe 3 for 1 or 3 for 2), what changes in terms of the "series
ticker"? That is, old strike=25, new strike=165/8, series ticker=U. I'm
confused about what the series ticker is and how it changes in split situations.
Any help would be appreciated. --Patrick Condon
The Options Clearing Corp. (OCC) will simply apply a new designation
to the new series, regardless of the option characteristics. A simple way
to find the new symbol is to go to the full option page on your datafeed
and simply scroll down numerically. You can find out more information by
going to www.optionsclearing.com.
CONVERSIONS, SHORT SALES, & B-LIST
I have some questions you might be able to answer for me. Regarding
the shorting on a downtick rule that is now in effect for NYSE stocks,
is there any difference now between a conversion and this new short sale
rule that went into effect recently? Will conversions have a better chance
of NXing the bid than other traders? In addition, what exactly does the
"B-list" of stocks mean? According to the link, these B-list stocks are
shortable on a downtick after 4:30 pm ET. Why would that matter if NYSE
stocks stop trading at 4 pm, anyway? Have you gotten more positive or negative
feedback from traders, especially scalpers?-Steve
Let's address these questions one at a time. The new "Sho" rules that
went into effect May 2, 2005, currently affect approximately 1,000 stocks.
There is an A-list (stocks that you may trade during the normal trading
day with the new rules), and the B-list (stocks that are only in play after
4:15 ET).
If you have a conversion (long stock, short call, long put), then you
may offer long stock at any price. If you do not have long stock, then
you must mark the sell order as sell short - but the order may be filled
on a downtick if it is in the A- or B-list above (subject to the time constraints,
of course). NYSE stocks trade after hours as well, thus the need for a
B-list.
Remember, this is just a pilot program, and we don't know if these changes
will be permanent at this time.
I'm asking my traders to mark their core stocks with an "A" or a "B"
to quickly determine if these lists apply. We are all gathering data to
see how our stocks respond based on peers that may not be on the pilot
lists. So watch your stocks and see if they respond differently by being
shortable on a downtick.
OPEN ORDER QUESTIONS
I put in an SS order for a stock today and the specialist opened
it at my number and then proceeded to take it north without ever going
south a penny. Is this a normal tactic for an SS open order? Also, last
week I had an open SS order for a stock that opened at my SS number, but
I didn't get it. Again, is this a normal tactic?--Niles
If the stock opens at your number, you may not be filled since sell-short
stock orders are last in line (behind sell-long orders and so on). And
yes, sometimes a stock may open near where it closed, the specialist may
not have to participate on the sell side, and the stock may just keep on
going. Anything can happen -- we just choose to trade the high-probability
plays (which the opening strategy is).
E-mail your questions for Bright to Editor@Traders.com,
with the subject line direct to "Don Bright Question."
Originally published in the July 2005 issue of Technical Analysis
of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright
2005, Technical Analysis, Inc.
Return to July 2005 Contents
