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Demystifying the Myth Beneath Pair Options


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Companies usually reward their senior employees and top executives. One of the ways is through stock options. They act as incentives either meant to encourage hard work or to appreciate good results posted at the end of a financial period. The value of this incentive can range from tens of dollars to millions. This is just one of the diverse avenues open to investors. Pair options, where investors take advantage of changes in stocks of two or more companies, are another way.

In order to understand how pair options work, investor needs to monitor and correlate the price movements of a pair of stocks. These should be from companies in the same economic sector. To simplify the process, pair trading software is used to map out price correlations. A trader can then decide whether to buy or sell. In a similar fashion, as holders of stock options, employees are given the right to buy into the company’s shares at a lower price than that prevailing in the market.

The employees are supposed to wait for some time before they exercise this right. If the stock trades at a high price, employees can exercise the stock options right. They can buy the stock at a lower price and resell it at the prevailing market price. Pair options, on the other hand, involve an assessment of volatility. Differences in volatility may mean a profit or a loss. Hence, a stock trader who chooses to deal with such instruments ought to be alert at all times.

Pair trading can be a lucrative undertaking especially for those with a good understanding of quantitative methods. Volatility changes in pair options trading are measured using Theta and delta. Theta measures the rate at which time erodes. Any change in the option price is measured using delta. Other measures include Gamma and Vega which monitor the rate of change and difference in price and volatility respectively. For stock options, the determining factor is the strike price. There are also some tax incentives enjoyed by holders of statutory options.

Judging by the somewhat complicated nature of pair options, buyers may wonder how to go about investing in such. A pair trading strategy is a must if any returns are to be enjoyed at all. Financial analysts may come in handy to provide some assistance. Once understood, the practice of dealing with pair options becomes routine. Stock options do not involve complicated processes. It is a matter of keeping track of the stock prices in the stock exchange. A stock broker can be consulted for guidance.

With stock options, employers feel proud to be associated with their company. This drives them to devote their time, in the process increasing profitability. In the end, they stand to benefit as the share price will go up. Success in pair options lies in how well a trader hedges risk and keeps track of share volatility. Investors need deep market knowledge and a keen point of view. Such astuteness can be learned by anyone with an interest.

Stockpair.com is the author of this article on Market Neutral.
Find more information on Market Neutral trading here

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Tannere Galton Article's Source: http://articles.org/demystifying-the-myth-beneath-pair-options/
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  • Posted On June 15, 2012
  • Published articles 2

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