CNQ Bear Call Spread and XOP Bull Put Spread

I am not sure if this is the right forum for this but anyway... Pairs trading is a statistical arbitrage strategy designed to exploit short-term deviations from a long-run equilibrium pricing relationship between two stocks. This is a well known strategy used by hedge funds and institutional investors. I have previously used pairs trading by trading two correlated stocks. Normally a trader would go long on an underperforming stock and, at the same time, go short on an outperforming stock. If properly constructed this approach eliminates net equity market exposure and the performance is then only depends on the relative performance of the two stocks. As you can see from the above chart CNQ             and XOP             are correlated and move in a very similar fashion. It is not surprising as they both have very similar drivers - the price of oil             and gas. CNQ             has recently been outperforming XOP             so to construct a pair trade a trader would short CNQ             and go long XOP             .
For this trade I utilised stock options by selling two January 2016 credit spreads at the same time - CNQ             $22/$23 Bear Call Spread for $0.26 and XOP             $27/$28 Bull Put Spread for $0.32. The total credit received from these two spreads - $0.58. The maximum risk for the trade is $1.42 per spread and the maximum return is $0.58 per spread (excl. commissions). If the spread between these tow stocks returns to mean, I should be able to profit from the trade. Let's see how this trade performs over the next 4 weeks when the Jan options expire.
Did you end up making money on this one? Looks to me like you got breached on the CNQ a week later at 22 and got breached on the XOP at 27 in Jan. Just my opinion but this is a little too close. Perhaps playing these further out would work better.
Options.Alpha SpreadEagle71
Hi SpreadEagle, I had Jan 15 spreads and oil really fell through the floor by then. Both CNQ and XOP followed the oil price decline and, as a result, CNQ $22/$23 bear call spread expired worthless but XOP $27/$28 bull put spread was in the money on the expiration day. So, the overall result was a loss of $0.42 ($1 spread on XOP less $0.58 credit received). The trade behaved more or less like an iron condor and to profit from the trade it required the two stocks not to move much. If I played with the same stocks as a pure pair trade (short CNQ, long XOP), then I would have made a profit as XOP declined less than CNQ but the whole idea was to use credit spreads. I will post another trade along the same lines as I like playing with spreads.
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