Monday, September 17, 2007

Home Depot / Lowe’s Pair Trade beats S&P performance

That was a perfect up and down for the duration of the HD/LOW pair trade….about 10 days. To provide you a background, here is my first post on the Home Depot (HD) and Lowe’s (LOW) pair trade that I initiated as of the close on August 31st.

As my first post highlights, the target price ratio for the pair was 0.873 (LOW/HD). On September 10th, the pair closed at a ratio of 0.880; HD at $33.81 and LOW at $29.76, resulting in a 3.6% return after commissions in 10 days. On an APR basis, this trade results in a 131% return, not too bad.

Over the same period, the S&P 500 performed at a –1.5% loss from 1,473.99 to 1,451.70, therefore the pair trade provides alpha on an net basis (after commissions and taxes).

Final Trade details

Opening Trades:
Sell Short 261 shares of HD at 9,999
Buy 322 shares of LOW at 10,001

Closing Trades:
Buy to Cover 261 shares of HD for 8,824
Sell 322 shares of LOW for 9,583

Total Profit, gross $756
Commissions of ($40)
Profit, net of commissions $716

I have attached an updated version of the price ratio chart through September 14th, 2007.

I will continue to look for additional opportunities to initiate this trade again….

Please leave a comment or email me if you have executed this trade successfully.

Author disclosure: I am neither long nor short HD or LOW