8/16/2020 Stocks mostly flat this week, and it looks like we will continue higher in the short term. I’m still not buying at these levels. Looking at an INO/NVAX pairs trade.

Hi everyone, welcome back. I hope you had a nice weekend!

Daily chart of SPY below. I still think we move lower in the medium to long term, but will probably continue higher in the short term. As a result, I am still not buying the index here for a long term hold. 

SPY weekly 8_16_2020

A trade that I have been looking at is the long INO, short NVAX trade. They are highly correlated stocks since they both make vaccines for Coronavirus. The trade idea is that since the spread between the two has widened a lot (~ 2 standard deviations from the mean), going long INO, and simulataneously going short NVAX for a 3 month hold before earnings seems reasonable. 

My position size if I take the trade would be very very small, and I would place a 25% stop loss on the trade. In other words, if the spread between them widens an additional 25% (drops to a ratio of .075), I would get stopped out. Since I only want to risk 1% of my account, I will only use 4% of my account on this trade.

I plan to take profits within 3 months (right before earnings) or if the ratio between them goes to .20. It’s a 25% stop loss and 100% profit exit, so the risk reward is roughly 4:1. 

Weekly chart of the ratio between INO and NVAX below:

INO_NVAX Weekly 8_16_2020

Daily charts of INO and NVAX below:

Ino daily chart below:

INO daily 8_16_2020

NVAX daily chart below:

NVAX daily 8_16_2020

I hope you all have a wonderful week! 


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