Australian (ASX) Stock Market Forum

Betting on A Widening of Spreads

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Long story short, does any one know how you could bet on a widening in a spread between to inversely related markets. I.e treasuries and equities?

I heard some thing about options but not sure.

I only ask because recently, the treasuries were way to close to coming close to their recent highs while equities were at their near all time highs. It felt like the pricing was way out of whack. I couldnt spread the bet because they are inversely correlated which meant they either possibly make money or possibly both lose money. Hence why i thought, making a bet that the gap between them would widen.

Anyway, as the initial question asks, any thought?

Thanks
 

CanOz

Home runs feel good, but base hits pay bills!
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Long story short, does any one know how you could bet on a widening in a spread between to inversely related markets. I.e treasuries and equities?

I heard some thing about options but not sure.

I only ask because recently, the treasuries were way to close to coming close to their recent highs while equities were at their near all time highs. It felt like the pricing was way out of whack. I couldnt spread the bet because they are inversely correlated which meant they either possibly make money or possibly both lose money. Hence why i thought, making a bet that the gap between them would widen.

Anyway, as the initial question asks, any thought?

Thanks
A spread refers to the price differential between two markets. I'm not sure the difference is really relevant because the market are not correlated, at all positively or inversely.

Here are some 30 day correlated markets, inverse included.

http://www.mrci.com/special/corr030.php

Here is the ES and the US 30 year Bond. I get what your saying, the bonds topped out (likely pricing in a rise in rates across the curve), but the ES only put in a pullback...

So not sure where you were going with this?

There can be a 'flight' to safety at times, when the bonds catch a bid as the ES starts to sell off, but there is no lasting inverse correlation, as we can see in the correlation matrix.
 

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I get what you're saying Can.

I guess in the longer term perspective the correlation is really way off, most likely to QE and the rest of that stuff?

I highlighted some spots on the chart and you're right about the flight to safety stuff.

equitytreasury.jpg

It just felt like the last top on the bond/treasuries shouldn't not have been there, especially based on the performance of the Equities. In my mental context, I could argue that the ES could have been topping out and a pullback in the ES could have seen bonds etc go even further up but since its been showing signs of possible acceptance (the es), the bonds started selling off.

My main point was, I wanted to make a wager on the fact that from that last area, before the the bonds just sold off a week or more ago, I felt that there was going to be a widening in the price between both markets.
 
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Hey History, thanks for the resource.

I went through some of the pages. Will have to read the rest but bones seems to have heaps of interesting ideas. Most of the stuff they talk about flies over my head though.
 
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