Pairing Up for Profit
To keep the dollar amount invested in the pair, one would buy at least three Gateway calls for every one Dell put purchased. The position makes money if the price spread between the two stocks converges over the next 14 months. The maximum loss is equal to the total cost of purchase of both the puts and calls.
Another possible pair involves going long the International Securities Exchange (ISE) and short the Chicago Mercantile (CME). The ISE is the leading options exchange, and with option volume growing at nearly 50% year over year, faster than any other trading product, the ISE's revenue and profit growth should outpace that of the CME in the coming year. The ISE shares are trading around $28, while the CME is around $388 per share. So in this case, one would purchase ISE calls and CME puts on approximately a 13-to-1 ratio.
Remember, paired trades require one to be right on two stocks, not just one, but options can expand the range in which you can be wrong and still make money.
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV