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Relative Value Arbitrage

Relative value arbitrage is a type of statistical arbitrage trading that bets on the price convergence of two securities.

How to arbitrage trading pairs that are at a relative value to each other?

First step: identify that your trading pair long/short have the following properties:
•Historic high correlation.
•Mean reversion ratio close to cero.
•Low volatility.
•Historic reverting trends based on market changing events like earnings report.
•Similar valuation metrics like (PE &Yield).
•Same market sector.

Second step: follow this set of self-depending trading rules:
•Begin to build the position once the pair starts converging again after its hits the divergence value of two standard deviations. (beta spread ~ 0.2)
•Close the position once the spread hits the mean or ...
•A stop loss of 20%.
•If the position is older than 50 trading days, and still open.
•If the position becomes more than 10% of your whole portfolio.

Relative Value Arbitrage Graphic

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