{"id":41325,"date":"2015-06-22T09:19:38","date_gmt":"2015-06-22T13:19:38","guid":{"rendered":"http:\/\/www.smbtraining.com\/blog\/?p=41325"},"modified":"2023-06-08T10:34:09","modified_gmt":"2023-06-08T14:34:09","slug":"how-to-add-probability-to-this-index-mean-reversion-pairs-trade-opportunity","status":"publish","type":"post","link":"https:\/\/www.smbtraining.com\/blog\/how-to-add-probability-to-this-index-mean-reversion-pairs-trade-opportunity","title":{"rendered":"Enhancing Probability: A Guide to Index Mean Reversion Pairs Trade"},"content":{"rendered":"<p>With RUT accelerating to new highs\u00a0and the SPX lagging &#8212;\u00a0is there an opportunity for a mean reversion pairs trade?<\/p>\n<p>I believe so.<\/p>\n<p>The probabilities are high for mean reversion. But, the danger of a mean reversion trade is the possibility of being too early.<\/p>\n<p>That is where options can give us additional edges.<\/p>\n<p>With options we can &#8220;lean&#8221; one way or the other and not <em>need <\/em>the directional bias to work out.<\/p>\n<p>A bearishly positioned spread in RUT (like the bearish butterfly) coupled with a more bullish spread in the SPX (like a medium probability credit spread) could allow for the mean reversion\u00a0bias to be profitable &#8212; even if there is no mean reversion.<\/p>\n<p>With August expiration 59 days out, that gives plenty of time and plenty of premium to work with for these two trades.<\/p>\n<p>Chart: SPX-RUT (Subtracts RUT from SPX)<\/p>\n<p><a href=\"http:\/\/www.smbtraining.com\/blog\/wp-content\/uploads\/2015\/06\/SPX-RUT-Pairs-Trade-with-Options-Strategy.png\" target=\"_blank\" rel=\"noopener\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-41326 \" src=\"http:\/\/www.smbtraining.com\/blog\/wp-content\/uploads\/2015\/06\/SPX-RUT-Pairs-Trade-with-Options-Strategy.png\" alt=\"SPX-RUT Pairs Trade with Options Strategy\" width=\"617\" height=\"609\" srcset=\"\/\/www.smbtraining.com\/blog\/wp-content\/uploads\/2015\/06\/SPX-RUT-Pairs-Trade-with-Options-Strategy.png 859w, \/\/www.smbtraining.com\/blog\/wp-content\/uploads\/2015\/06\/SPX-RUT-Pairs-Trade-with-Options-Strategy-300x296.png 300w, \/\/www.smbtraining.com\/blog\/wp-content\/uploads\/2015\/06\/SPX-RUT-Pairs-Trade-with-Options-Strategy-45x45.png 45w\" sizes=\"auto, (max-width: 617px) 100vw, 617px\" \/><\/a><\/p>\n<p>Andrew Falde<br \/>\nafalde@smbcap.com<br \/>\nSMBU<\/p>\n<p>No relevant positions.\u00a0<a href=\"http:\/\/www.cboe.com\/resources\/intro.aspx\" target=\"_blank\" rel=\"noopener\">Options Risk Disclaimer<\/a><\/p>\n<p>&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>With RUT accelerating to new highs\u00a0and the SPX lagging &#8212;\u00a0is there an opportunity for a mean reversion pairs trade? I believe so. The probabilities are high for mean reversion. But, the danger of a mean reversion trade is the possibility of being too early. That is where options can give us additional edges. With options we can &#8220;lean&#8221; one way &#8230; <a href=\"https:\/\/www.smbtraining.com\/blog\/how-to-add-probability-to-this-index-mean-reversion-pairs-trade-opportunity\" class=\"more-link\">Read More<\/a><\/p>\n","protected":false},"author":1039,"featured_media":41326,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[2115,3063,2349,4492,1435,4483,55],"class_list":["post-41325","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-general-comments-2","tag-add","tag-index","tag-opportunity","tag-pairs","tag-probability","tag-reversion","tag-trade"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.1.1 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Adding Probability to Mean Reversion Trade | SMB Training<\/title>\n<meta name=\"description\" content=\"Increase the probability of success in your trading with this 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