NAK1987

CXW/GEO Pair Trade hedge

CXW/GEO  
CXW/GEO  
I was initially long GEO and was not interested in CXW . GEO has great history of good runs after election cycles and has, in the past outperformed CXW . I changed my mind today, after being stopped out on my GEO long and noticing that CXW's chart was much less affected by Biden's action to order the Department of Justice to end its reliance on private prisons... Why I asked myself ??

So, short and sweet , here is what I found ...

1) GEO is 14% exposed to BOP vs. CXW at 3% from a revenue standpoint (probably biggest factor here)

2) CXW's Managed Only Beds account for 12% of its total bed capacity while this number is 30% for GEO .
( managed only meaning they do not own the real estate on these ones )

3) GEO is approximately twice as leveraged as CXW and CXW has already eliminated its dividend with plans to further de-leverage .

GEO will be hurt more than CXW by loss of federal contracts. CXW is nicer situated to outperform GEO going forward ...

How I plan to trade this :


I will take a long on CXW first as the technicals look nicer for long entry at this time. For the short on GEO , I plan to wait for a little more upside before shorting, I will wait for the next cycle up to short GEO . Equal position sizing in each.

I still have lots to learn with ratio trades, this is my first one I have decided to publish and it's only my point of view. So, please do additional research if you decide to enter yourself, just sharing a perspective here. :)
Constructive input is always appreciated and welcome too.

Good luck ~

Comment: Clearly should be working at more of these kinds of beta hedges :) Especially if one is selling calls at the same time .
Comment: This one was my first attempt but I am going to try some more as a separate strategy in the future with a dedicated account aimed at collecting options premiums while staying hedged

Comments

Geo has high short interest and at the moment seems to be getting the WSB bump.
Reply
NAK1987 sanjin999
@sanjin999, Agreed 100%, I think these hedges need to be entered carefully , I know a lot of pros will beta hedge these trades, sometimes without physical stops, and hold long term. But, I have been trading these hedges a little different and have put extra thought into how I should trade them while limiting risk .

Generally speaking, my long positions are typically only 2.5% of account and my shorts are typically only 0.5% of account (to help limit the risk as shorting is certainly more risky). I am pretty much always typically net long, but depending on market cycles , and especially around this recent two week period, I try to build on my short positions to help hedge . Rather than beta hedging I am going to try doing these trades exactly the same as I normally would.

I will swing the long side if there is a good solid entry and use a comfortable technical resistance/support range to determine an exit and stop . I will do this for both long and short side of pair but likely will have to enter one at a time and place one on a watch list . Using this method would allow me to be around 20% short, which I am happy with.

I wouldn't be beta hedged but since I am taking advantage the the swing trading method and entering/exiting on a detailed plan, I think this would work quite well and not to mention there would be physical stops on everything too, for risk management.

I already trade effectively with a similar concept but I think I/we can add to the effectiveness of my current strategy by developing a list of pair trades to work off and keep on watch for extra opportunities, basically a watch list with long and short trades . I find its easy to get carried away and take too many longs without protection so a long list of good pairs would be an asset .

Also, on my shorts, if the short float is excessive and especially if the short ratio is high I won't enter unless its popped and I feel like shorting it as a day trade it on heavy selling. Personally, I prefer swings and have been much more successful swing trading compared to day trading .

Obviously no one does things the same , we all find our own way don't we :)

Thanks for the comment.
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