Dual Long & Short position with stop tactic

PhiliousPhogg

Surely this has been thought of and discussed before but I'm not around that long:

If there were a market announcement due that was likely to either send an index/security one way or the other (such as a Fed rate hike decision), and I were to take 2 positions:

1) Long the index/security with a small stop and a relatively large limit, and
2) Short the index/security with a small stop and relatively large limit

If as expected the market shifts in one direction, one position will close out with a relatively small loss (assume the stop is guaranteed) while the other will close after the market has moved at a larger gain, resulting in a net gain, possibly a significant net gain.

Now there is the possibility of a benign reaction in the market that doesn't send it as far as either stop however we assume this is a low probability.

For example, the Sept Fed meeting decision on interest rates will likely affect the USD and S&P500/Dow one way or the other, with enough probability of both scenarios priced into valuations that either decision will result in a reaction up or down in USD and major indices. This is just an example for argument's sake, we don't need a discussion on the Fed hike, I'm just proposing the above trading tactic on the assumption you expect a security will react to a market event.

Am I missing something here? Would spreads widen in such a scenario?

ixus

In short, it doesn't work.

Your analysis makes no real suggestions to how it might not work or the risks. You assign no probabilities to getting stopped on both legs. That's your real risk. Just prior to a data figure, liquidity dries up. Algos usually whip up amd down the prices searching for stops. E.g. the euro might spike 100points just before non farms and reverse on the figure. I see this all the time. They are designed to trigger stops.

Also, you are using the word probability just to suit you. Not actually assigning any calculated value.

You might want to look into spread trading (or pairs as retail call it).

PhiliousPhogg

I see what you mean. That's what I hadn't thought of. Liquidity dries up, HFTs come in and boune the price around a bit to stop out positions. It's hard to believe they would be powerful enough to individually affect a market as big as the USD but there you go.

For ever odd

Depending on what broker you are using, slippage has to be taken into account around volatility. ie your friendly broker will take this opportunity to screw you over, guaranteed stops will cost alot more ect.

ixus

PhiliousPhogg wrote: »

I see what you mean. That's what I hadn't thought of. Liquidity dries up, HFTs come in and boune the price around a bit to stop out positions. It's hard to believe they would be powerful enough to individually affect a market as big as the USD but there you go.

They sure do. Take a look at 5 min chart of S&p from yest between 10 and 12 i think. Smashed it both ways with volatility auctions during a quiet period. Nanexllc on twitter will have some advanced charts on it.

See if you can get a 1 min chart of euro/usd from last non farms. Its the norm as opposes to exception.