Long-Only Spread Trading Strategy Using Microsoft And Alphabet Stocks

Core Insights - The article presents a long-only spread trading strategy that focuses on buying the relatively weaker stock between two correlated assets, specifically Microsoft (MSFT) and Alphabet (GOOGL) [1][20] - This approach aims to capitalize on temporary price divergences while avoiding short selling, thus simplifying the trading process [2][21] Strategy Overview - The strategy identifies moments when MSFT and GOOGL, which typically move in tandem, diverge in price, allowing for potential profit when the weaker stock reverts to the mean [3][20] - A time series is created to analyze the spread between the closing prices of MSFT and GOOGL, serving as the basis for trading signals [4] Technical Analysis - Bollinger Bands are applied to the spread to detect extreme conditions, indicating when the stocks have deviated from their typical price relationship [5][6] - Entry points are established when the spread crosses below the lower Bollinger Band, signaling that MSFT is underperforming relative to GOOGL [9] Performance Metrics - The strategy was backtested from 2010, showing a total of 455 trades with a win rate of 63.3% [13][16] - The average profit per trade is approximately $88, which covers operational costs while providing a positive net margin [14] Profit Distribution - The strategy generated a net profit of $17,392 from trades on MSFT and $22,760 from trades on GOOGL, demonstrating balanced returns between the two stocks [15][17] - The results indicate that the strategy's logic is robust, regardless of which stock is used as the reference [15] Conclusion - The article concludes that a simplified approach to spread trading can yield stable and consistent returns, emphasizing the effectiveness of a straightforward trading mechanism [18][22]