The first step you must undertake in order to trade pair options is to locate a suitable broker. Unfortunately, as this investment type is relatively new, your choice is quite restricted. In fact, the only company that provides such a comprehensive on-line service is Stockpair which will allow you to trade pair options by selecting from extensive list of over 75 asset pairs.
Once you have open an account with Stockpair and make your initial deposit, you can then start opening positions by visiting its trading room. A screen will appear enabling you to activate pair options as well as choosing which stock market you would like to trade, i.e. either USA or Europe. You should particularly notice that the assets comprising the pairs on offer are those of companies whose trading performances are highly correlated and in the same marketing sectors, i.e. Shell/BP, Barclays/HSBC and BT/Vodafone, etc. These features are especially important as they will enable you to detect any sudden deviation in the comparable trading patterns of the two companies comprising a pair.
Once you have selected a pair, a new screen will appear allowing you to opt for your preferred type of pair option. You have two choices which are fixed or floating. The former enables you to choose a fixed expiry time and the measurement of the relative performance of the two assets commences as soon as your trade is activated. In contrast, floating options can be cashed-in before their expiry dates elapse and the measurement of relative performance starts at a predetermined period of time, such as a day, week or month. They can payout large returns in excess of 300% compared to about 80% for fixed options.
You must then choose an expiry time which can range from one hour up to 150 days for fixed pair options. Next, you need to decide which of the two assets comprising your pair will outperform the other within a specified time. The payout for each stock is readily displayed so that you will know exactly the return you can expect if your option finishes in-the-money at expiration. Finally, you must enter the size of your deposit and chose which asset you think will outperform the other. A trading chart will appear displaying the relative performance of the two assets continuously until expiration.
Fixed Pair Option Example:
BP’s shares are appreciating following an important acquisition. Consequently, you chose a the SHELL/BP pair with an expiry time of 1 day and since you believe that BP will outperform SHELL within that period you chose BP. Your investment is $1,000 and the payout will be 85% if in-the-money.
As soon as you execute the trade by choosing Shell, the relative performance of the two stocks begins to be measured and displayed immediately. After one day, BP does record a superior performance and you receive a payout of $85.
Floating Pair Option Example:
On Monday at 10.am, you activate a $200 trade using the Barclays/HSBC pair option. You have determined that Barclays will outperform HSBC by the end of the week. The measurement of relative performance commences at the start of Monday and not when you activate the trade at 10am. At the end of the week, Barclays does register a superior performance and you receive a payout of $800. You could close your trade before expiration if your broker begins displaying a profitable ratio once Barclays starts outperforming HSBC.