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Hi Ara,
Sunday, April 20, 2003, 3:36:41 PM, you wrote:
AK> 17.5% in 4 months is a lot more than I was anticipating!!!
About 3 1/2 months, which is long for me -- quite long, actually. And
this trades in a margin account, so I'm actually tying up that much
buying power, but not that much capital. So the return is higher;
right now we get 3-1 leverage in Tokyo.
AK> Good trading
Thanks.
I think these kind of things can be found in a lot of places. I have
done this trade several times from both sides, and I think this was
the longest holding period. I suppose I'll get clipped on it one of
these days, but I'm unlikely to ever give back what I've pulled out
of it.
I clearly remember the first time I did it way back. I had noticed
what I thought was a glaring opportunity, and had spent a good
portion of the weekend sizing it up and trying to see where the
"obvious" pitfall was. I went into my broker's office before the
market opened on Monday, and laid out all my spreedsheets and charts
in front of him, asking for a reality check if you will. He said
this was very dangerous, and that no retail investors he knew of ever
did anything like this. (He was actually the branch manager of a
Nikko office -- one of the two firms involved in the spread, and
where I had my account at the time, and when the bandits in Japan all
charged about 0.8 percent each way on a trade.) I waited one more
day, and the next afternoon I ordered him to put the position on,
only 20,000 shares each way. Five days later I took it off for 20K
net US equivalent. He was sheepish (but said "congratulations") and I
thought I was the queen of the TSE. But three weeks later the trade
would have netted me 100,000 US equivalent. ^^_^^ I've learned to be
very demanding on my entries, and to hold them just a bit longer when
I get a good entry, or at least scale out.
If you find a good setup like this, at the right entry it really is
pretty low risk. It's worth the double commission and the extra
tie-up of capital. The key for me has been patience on the entries.
There have been several occasions when I thought I had a "pretty
good" entry chance, but didn't take it, and was glad to have avoided
the pain, even temporary pain, that taking it would have caused. In
almost all cases, I got a "fantastic" entry by waiting just a bit
more, and have never experienced anything I'd remotely call pain on
this type of trade. But pain is there for the taking if you gamble
anywhere near the middle, or if you settle for "pretty good".
There is no way to call this based on the market conditions, either,
in my experience. It's just absolute price differential between the
two, and historical study of that differential. I almost bailed too
early on this last one, because generally this spread will contract
in a falling market, and expand in a rising market. But this time,
even though the market was not very good, the bottom dropped out of
the short and the long held quite firm, once again reestablishing
their more "normal" price differential.
I also find you need to consider both absolute differential and
percentage differential, particularly when working the spread in
reverse. Right now, the percentage differential is high, around 50
percent. That gets us up toward 2 std devs, I think about 1.8 right
now. But the absolute differential is almost smack on the center of
the std dev right now, actually just below median. I judge there to
be excessive risk right now, either way, on this pair. I will simply
wait until they make me a present again. Seems they always do. Just
wish I didn't have to wait 2 years or longer sometimes.
Yuki
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