Trading Relative Outperformance with Long-Short Positions or Options
Summary
The document asks how to profit if one asset earns a higher return than another over a fixed period, regardless of whether either asset rises or falls. The answers identify a pair trade as a direct way to express that view: go long the expected outperformer and short the expected underperformer. This targets relative performance rather than the direction of the overall market, though the realized outcome still depends on position sizing and the assets’ price paths.
The responses mention cash equity long-short positions and paired single-stock futures, as well as an outperformance option. Futures may be useful where available, particularly for larger trades, but the answer notes that single-stock futures can be illiquid. The document does not specify contract terms, hedge ratios, financing and borrow costs, or how to construct or price an outperformance option. These instruments can express the relative-return view, but their availability and costs depend on the assets and market.
Key ideas
- A pair trade expresses relative performance by buying one asset and shorting another.
- The view concerns which asset performs better, so both assets can have negative returns.
- Paired single-stock futures are another possible implementation where contracts are available.
- An outperformance option can provide a direct payoff tied to relative asset performance.
- Liquidity, financing, and shorting costs affect how practical each implementation is.
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Full text
# How to trade on whether one asset will be higher than another? # How to trade on whether one asset will be higher than another? I was wondering if there is any way to trade on whether or not one asset would earn a higher return than another in some predetermined time period. It would be sort of like gambling on horses except for shares in companies. For example, I could make a trade today that in one months time, apple's share will have yielded a greater return than google's shares. Then, if this happens, the person I closed the deal with pays me a premium, if not, I pay them. That way, I do not necessarily have to determine whether or not the company will go up or down, I just have to determine whether it will outperform another company (even for negative returns). Are there any financial instruments that would let you speculate in this way? I was thinking that maybe some combinations of options would be able to do it, but I haven't yet figured out how. Please let me know if you have any ideas how to trade in this way. Thank you. ## Answer by user42108 (score 2) https://quant.stackexchange.com/a/68257 Sounds like you simply want to do a pair trade (i.e. long one stock and short the other). I doubt this is more easily done via single stock futures (illiquid) and standard implementation would be cash equity L/S. You could also trade an outperformance option on the two stocks. ## Answer by Alper (score 0) https://quant.stackexchange.com/a/68250 You can speculate on one stock outperforming another over the next few months using single stock futures. You would buy the futures of the stock you think that will outperform and sell the futures of the one that you think will underperform. Another way to do it is to buy the stock to outperform and borrow and sell the one to underperform but it is usually easier and less costly to do it via single stock futures, especially if you are dealing with relatively large volumes. This Investopedia page tells more about single stock futures. You can speculate on the relative performance of pretty much any two assets that have future markets using the same method with single stock futures.
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