CFD Investment Strategies: How To Make Big Profits Using Pair Trades

Core inflation in the US rose to 4.5 percent in June. However, many market observers and the US Federal Reserve see this only as a temporary phenomenon.

An important reason for this view is given that the prices in individual product groups are currently overshooting due to pandemic-related bottlenecks. If the situation normalizes, prices should fall again accordingly. But there are also numerous market insiders who see it differently and are convinced that US inflation is here to stay. This includes the asset manager Bantleon. The Swiss see pent-up consumer demand and expect higher wages and higher rents due to the sharp rise in house prices in the USA.

Prices have also risen in Europe, but much less so than in the USA. In terms of the economy, the US is already further in the cycle than Europe, as the Americans started vaccinating against the coronavirus earlier and were therefore able to end the lockdown earlier.

The Fed will therefore probably cut back its bond purchase programs sooner than the ECB, since the economy is self-sustaining again and, unlike in Europe, needs fewer stimuli. That should weigh on American stocks, while Europe’s stock markets continue to benefit from the ECB’s purchase programs and the economic catch-up process.
In addition, there is the lower rating in Europe. “In view of the record hunt, the US markets are no longer valued fairly. The S&P 500 is trading at a P / E ratio of 27.7 for 2021. The Euro Stoxx 50 comes to a P / E ratio of 24.7 Shares from the old continent still have potential, “says Christian Henke, analyst at CFD broker IG.

Investors can take advantage of this scenario by betting on a falling US benchmark index (going short the S&P 500) and at the same time speculating on rising European stock markets (going long the Euro Stoxx 50). This strategy is called pair trade and is easy to implement with CFDs.

Just like another pair trade, namely to speculate on falling prices for the car manufacturer Tesla and at the same time on rising prices for German car manufacturers such as VW, Daimler or BMW. The idea behind it is, on the one hand, that Tesla has an enormously high three-digit P / E ratio, while the German car companies are only valued in one digit.

“Europe’s auto sector in particular was not recently on investors’ shopping lists, even though it is valued far more favorably than the overall European stock market,” Henke also favors German and European car companies.
But that’s not all. Tesla faces stiff competition from hybrid and electric cars. “Now the German automakers are the Tesla hunters. They are aligning their entire corporate strategy to e-mobility,” says Jochen Stanzl, chief market analyst at CFD provider CMC Markets. VW wants to sell one million electrified cars including plug-in hybrid vehicles in 2021. The development is going in the same direction at Daimler and BMW, which are increasingly delivering electric and hybrid cars.

Profit is not made with cars

In addition, Tesla has so far made little money with its cars. The US company makes the main profit by trading Bitcoin and selling emission rights. The looming loss of the previous lead in electric cars is unlikely to change that in the future. In the current year, Tesla has fallen far behind VW with around 26,000 vehicles delivered in ten European countries. Another brake block is the manageable product range.
Despite the long smoldering fierce criticism, it must be said that Tesla boss Musk has so far always managed to keep investors and industry observers happy and to increase the value of Tesla shares or to keep them at a high level.

Still, the chances are good that investors short on Tesla and long on VW are right. Another possibility to build up the long counter position to Tesla is offered by CMC Markets with a CFD on a basket of ten European car stocks, in which VW, Daimler and BMW are weighted at 50 percent. If the speculation works out in the Tesla pair trade as well as in the S&P 500 short and Euro Stoxx 50 long, investors earn twice. The trades are also worthwhile if the European carmaker or the Euro Stoxx 50 fall less sharply than Tesla or the S & P 500. Then the return with the short position is higher than the loss with the long position.
A loss arises if the European carmaker falls more sharply than Tesla or the US car title rises higher than VW & Co or if the car basket falls and Tesla rises. The same applies to the constellation Euro Stoxx 50 long / S & P 500 short.

The losses can be very high.

The idea behind pair trading is that investors are not only positioned in one direction, but can generate a positive return on rising and falling stock markets. “It is only important that one market does not run away from the other in the wrong direction or that markets even run in the opposite direction to their own position,” says Stanzl.
CFDs are a good way to implement the pair trading strategy. They enable speculation with leverage with little capital investment. Leverage makes sense, as otherwise the returns would be rather meager. Both positions should be entered into with the same amount of capital and leverage. This is simple with CFDs, since the same volume is simply used for the long and short position – for example 3,000 euros each.

CFDs have advantages over certificates

With warrants, it is more difficult, because you have to pay attention to code numbers, terms and subscription ratios. Knock-out certificates have a barrier and, in some cases, a term. It is time-consuming to find two papers with the same leverage, identical maturity and the same distance from the barrier. If the barrier of one knock-out paper is touched, the other must also be sold and the entire item must be recreated. With CFDs, on the other hand, there are neither term limits nor barriers and trading long and short is possible on one platform.
CFDs are also suitable for this strategy because of their efficient cost structure and high flexibility. A position can be turned from long to short and vice versa with just a few clicks. In the case of knockout papers, on the other hand, two certificates have to be purchased, which often incurs trading costs.

In addition, many CFDs are traded 24 hours a day. In contrast to knockout papers, there is no overnight risk. But not the currency risk. “Anyone who sells stocks traded in US dollars from a euro account short and buys euro shares can suffer losses in the dollar position if the dollar appreciates,” said Stanzl.

However, CFDs have a disadvantage compared to knock-out certificates. These can also be bought on the stock exchange. Advantage: The trade there is monitored.