Taking risk in the capital markets is generally looked at from the perspective of the direction of an underlying asset.  There are numerous products that have been created to take advantage of the actual direction of stocks.  The risks and payout profiles that have been created by financial engineers still make the risks directional, and move at the whim of market sentiment.

Savvy investors has generated risk in the form of relative value trades, which allow a portfolio managers the option to look at risk as one stock vs. another.  This type of strategy, know as a market neutral or long short strategy, removes the Beta from market risk and instead purely focuses on market alpha.

Directional risk entails initiating exposures to the direction of movements in financial market variables. For example a portfolio manager believe the price of IBM stock will move higher.

Basis risk, or spread risk which can be accomplished by taking a hedged position that never long nor short  involves other remaining exposures, such as nonlinear exposures, exposures to hedged positions. These non directional exposures are measured by exposures to differences in price movements, or quadratic exposures.

This risk may arise when a position involves two products that are similar, but not exact. For example, if a portfolio manager has a position that is long Google and Short Apple.

Beta is the  risk for exposure to general stock market movements. Beta is calculated using regression analysis, and you can think of beta as the tendency of a stock return to respond to swings in the market. A beta of 1, (which corresponds to an r-squared of 1) indicates that the security’s price will move with the market. A beta of less than 1 means that the security will be less volatile than the market. A beta of greater than 1 indicates that the security’s price will be more volatile than the market. For example, if a stock’s beta is 1.2, it’s theoretically 20% more volatile than the market.

Trading spreads can be accomplished by looking for opportunities were an anomaly exists where there is a divergence in the returns of two stocks which are generally highly correlated.  This presents an opportunity for an investors to bet on the reversion to the medium term mean of the stock pair.  Obviously there could be a sound reason for the pair to uncouple, and an investor risks the market moving against them, without a technical stop to exit the position.

Fortunately for investors, a new product called  Pair Options have been created.  This new derivative product allows investors to trade on the relative value of one stock to another.  The question is asked, which will move higher, Google or Apple, HP or Dell.  The product is set up in a binary option format.  Investor receive a fixed payout if one stock performs better than another.  The time frame for the option is from hourly to multi-month and allows the investor to have a fixed risk profile based on a relative value trade.

Pair Options represent excellent earning opportunities and thanks to Pair Options broker Stockpair you can now trade these instruments online using their innovative and patented trading platform.

The Benefits of Trading Pair Options

• Sell Fixed Pair Options back at any time prior to expiry
• Market Neutral Trading – Market Direction has no influence on the outcome of your trades
• Wide range of expiry times
• Over 100 Pairs of Assets available to trade
• Returns of up to 86% for Fixed and 680% for Floating Pair Options
• Use proven strategies to make consistant profitable trades using Pair Options

How to Trade Pair Options

Types of Pair Options

There are two types of Pair Options that you can trade. One type is known as the Fixed Pair Option. This type of option works the same way as a Binary Option with each trade only having two possible outcomes, either the option expires in the money or it does not.

The second type of Pair Option is known as a Floating Pair Option. The floating Pair Option differs from the Fixed Pair Option in two ways. The first difference is that that the return on this type of option is not Fixed. In fact when trading Floating Pair Options you can sell the option back to the broker at any time prior to the expiry of the option. This leads us to the second difference between floating and fixed pair options and that is the expiry time. When trading the fixed variant of pair options the expiry time is taken from the time that you place the trade.With the Floating pair option the expiry time of the option is counted from when the option became available to trade.

Returns when trading Pair Options

Returns between Fixed and Floating pair options vary greatly. A  in the money trade of a Fixed Pair Option can earn you up to 86% depending on which pair of stocks that you trade. When trading with Floating Pair Options returns at Stockpair can be up to 680%.

Pair Options Strategy

To start trading Pair Options click here to visit Stockpair.

Major Update to Pair Options :

You can now sell your Fixed pair option back to Stockpair and set stop/loss and take profit levels for all fixed options that have a longer then 1 hour expiry time.This makes fixed pair options one of the most flexible type of binary options and creates many more opportunities for profitable trades.