Brand New Position (12 US stocks)
Today I’m happy to introduce a new position.
It is a long/short trade with 12 stocks : 6 longs and 6 shorts.
The aim is to go long 6 stocks and go short 6 other stocks (see below).
Usually, and until now, I always used “simple” Long/Short trades, with one asset on the long side and another asset on the short side (stocks or indices or commodities).
Today, we’ll do things a bit differently. The goal here is to spread the risk among different stocks. So I created a basket of 6 stocks for the “buy” side and another basket of 6 stocks for the “short sell” side.
How will I manage this position ?
Well, let’s assume the stocks I want to buy are : B1, B2, …, B6.
Let’s assume the stocks I want to sell are : S1, S2, ..., S6.
A usual Long/Short trade would consist of looking at the ratio B/S (B price divided by S price).
Here it is pretty similar, I’ll just be adding all the “buy” prices and all the “sell” prices:
Ratio = (B1+B2+…+B6) / (S1+S2+…+S6)
Again, with this global long/short position I don’t really care about the overall market direction. Using a specific stock picking strategy, my goal is that my “long” basket outperforms my “short” basket, whether the global equity market goes up or down.
Before telling you exactly which stocks I’ll buy and sell, let’s talk about the strategy.
The strategy
I’m going long profitable, low debt, undervalued companies.
I’m going short not-so profitable, high debt, overvalued companies.
Quite simple.
Now, why 6 stocks on each leg? Well, less wouldn’t be diversified enough, and more would dilute the strategy and be more complicated to manage.
With this kind of strategy, I would say between 5 and 7 stocks on each leg is manageable.
Also, this strategy comes on top of the other 5 (long/short) trades that are currently live in the trading portfolio.
The 12 Stocks
Without further ado, here are the companies involved in this trade.
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