Who Doesn't Like Free Stuff?
I was contacted by the Nasdaq OMX to help promote what are being called "Alpha Index Options." I'll tell you exactly what's going on with these new instruments, and then you can use the form below if you want to signup for the AAPL TV Contest.
Pairs Trades, Simplified
A quick and dirty way to explain a pairs trade is that you get long one security and short another, where you expect the former to rise faster than the latter. Now you can do pairs trades against highly correlated stocks (stat arb), or you can get long an individual stock and short the index. By putting on an index short against a stock, you are looking to generate "alpha," which is any return that is pulled outside market volatility.
The problem about pairs trading is that it requires a lot of margin to short the index or stock, and could lead to significant risk if the correlations completely break down. What these Alpha Index Options do is allow the investor to gain exposure through simple pairs trades without the additional margin requirements.
Now, It's Optionable
The Nasdaq OMX is now taking these indexes and making them optionable. The difference between basic options and these is that you have to worry about two sources of volatility: the stock and the underlying market that it is hedging against. This will most likely lead to some interesting option pricing mechanisms, but for the sophisticated trader it should offer very nice opportunities.
There are currently only a handful of indexes being released: pairs with AAPL, GOOG, RIMM, and AMZN -- all against the SPY. Some more are getting released, and you can get the full list here.
Now, for the contest.
If you want to get a little more information about how these indexes will work, as well as an opportunity to get an Apple TV, fill in the form below. We will keep the contest until Friday after market close, and then we will randomly select a winner out of that list.
You can learn more about Alpha Index Options here.