Two Stocks Diverged On A Chart…


(click for larger, clearer image)

…and I took the trade less traveled? What’s the ending to this…? Why am I bringing Robert Frost into my blog?

I was reading Dan Frommer’s article at TBI which was basically a recap of Walt Mossberg’s thoughts on the new Verizon iPhone. They tickerized the headline with VZ and APPL, but I think that is a mistake here and they just being traffic whores.

The trade is between AT&T (T) and Verizon (VZ). Apple and the iPhone are catalysts, but not part of the trade directly. The question is, “do you think that Verizon is going to eat AT&T’s lunch now that they have the iPhone on their network?”

Some might think so, and that might account for the divergence in the % appreciation when you compare the stocks to one another. The divergence (spread is widening) is represented by the widening gap between the red and blue lines on the chart. If they move closer to one another, they are converging and the spread is narrowing.

If you think VZ is going to outperform T, then you can create a pairs trade or spread by:

Buying VZ
Shorting T

This can also be called a “relative value trade” because the trade here is the relationship between the two stocks, not the direction of either one as an outright trade. It is lower risk, however, if you over-leverage the trade you can still lose big because both can go against you if you’re wrong.

Disclosure: I use an Android device, so I don’t have a dog in this race. I’ll be back next week in full force blogging again. Off to teach the Master Class on Friday and finishing the third and final revision of my book.

Please note: I reserve the right to delete comments that are offensive or off-topic.