Skip to main content
Track Hedging strategy
18 / 23
Search the archiveLibrary
Library

2015issue C0923

Unused peer hedge after an ATR-qualified pair entry

A dual-class pair can be opened as a one-sided equity after a full average true range decline, with the more liquid class left unused. An equivalent-dollar short in that reserved name can later replace stock or market risk with the last-price spread.

  • A directional long, short, or themed basket can be opened first while a related name is held unused unless exposure later needs to be reduced.
  • One long setup waits for a full average true range decline into multiday support and a start of stabilization before the unused peer is reserved as the hedge.
  • Shorting an equivalent-dollar amount of the reserved class converts leftover risk from the original stock or the broader market into the last-price spread.
  • Intraday pair fitness is judged on tick or one-minute bars, because names that look aligned on end-of-day data can still diverge during liquid sessions.
Entries in this reading3 entries
Pairs trading19 readingsCurrent trackHedging strategy25 readingsATR position sizing44 readings

Open one name and hold the peer in reserve

A directional long or short, or a themed equity basket, can be opened first while a related hedge is kept unused unless later exposure reduction is needed. The reserved name does not have to be placed at the same time as the first position.

A dual-class pair as the working example

DISCA and DISCK were presented as a dual-class pair with 100% short-term correlation and greater than 97% correlation over one year. The more liquid class with the tighter bid-ask spread is typically reserved as the unused hedge while the other class carries the directional entry.

Editorial reading: the two classes are treated as one relationship so a later hedge can replace market direction with relative-value risk.

Qualify one-sided size after a full ATR decline

One long setup waits until the pair has fallen a full ATR into multiday support and begun to stabilize before the unused peer is held back as the hedge. A breakout variant buys a new 20-day high on one class after it has cleared a stated distance beyond the prior high, again leaving the other class unused.

Editorial reading: a full average true range decline is a pre-entry volatility filter, so directional size is taken only after a bounded, measured move.

Change leftover risk into the last-price spread

Shorting an equivalent-dollar amount of the reserved class converts remaining risk from the original stock or the broader market into the last-price spread between the two classes. Once the original long is already below the purchase price, adding the peer hedge recoups value only if that spread sits on the wide side of its daily fluctuation.

Editorial reading: matching dollar value in the reserved name leaves residual movement in the last-price spread rather than in either stock or the index.

Judge pair fitness on an intraday clock

Intraday pair fitness is judged on tick or one-minute bars because names that look aligned on end-of-day data can still diverge during liquid sessions. Pairs that share a longer-run cointegrated link can still be poor short-horizon hedges when they diverge over the session.

Editorial reading: tick or one-minute bars are the relevant pairing clock, and end-of-day correlation is an incomplete screen.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
18 of 23 in the Hedging strategy track
201630-32 pp.Next on Hedging strategyContinuous index hedges fail the annual cost testRepeating an illustrated 3,500-unit at-the-money 90-day protective put each quarter on a 100,000-unit book produces a 14 percent annualized insurance drag.
All readings on this track · 23 readings
  1. 1982Basis-managed hedges and related market substitutes
  2. 1990Options as insurance unless the process is complete
  3. 1996A price-weighted technology index as a hedge and sector proxy
  4. 2002Single-stock futures as a month, margin, and hedge overlay
  5. 2004Listed volatility futures as a portfolio volatility hedge
  6. 2006Customized commodity hedges for bond and equity portfolios
  7. 2007Use of capital for overnight pairs and hedge layers
  8. 2007Opening auctions, limit envelopes, and overnight hedges
  9. 2008A two-gate intermarket test for equity bear hedges
  10. 2010Gold futures after a large setback: cluster risk and hedge timing
  11. 2011Partial commodity hedges, seasonal timing, and option income
  12. 2011Commodity-linked shares are a wrapper, a performance-bond, and a hedge-design problem
  13. 2012Hedging an open bull vertical
  14. 2012Construct a two-pair and three-pair hedge rule book
  15. 2014Equity and SPY stress pairs with a scaled index hedge
  16. 2015Yearly at-the-money covered calls on a dividend basket
  17. 2015Pair hedge to hold a valid idea through noise
  18. 2015Unused peer hedge after an ATR-qualified pair entry
  19. 2016Continuous index hedges fail the annual cost test
  20. 2016A VIX overlay as three stacked constraints
  21. 2018Late-cycle index overlay to keep equity dividends
  22. 2019Treat a bear-market hedge as a regime switch
  23. 2019Hedged pairs as game-theory payoffs
By fieldIntermarket and spreads162 readingsBy year2015101 readings
All 25 readings tagged Hedging strategy
Also on Hedging strategy5 readings
2007Use of capital for overnight pairs and hedge layersPairs trading2007Opening auctions, limit envelopes, and overnight hedgesPairs trading2014Equity and SPY stress pairs with a scaled index hedgePairs trading2015Pair hedge to hold a valid idea through noisePairs trading2019Hedged pairs as game-theory payoffsPairs trading