Aetna, Cigna — Shorting Spread Volatility

Here’s a quick snapshot of a trade I’m currently in.  Short Aetna (AET), long Cigna (CI).

Aetna gapped up on Feb 4 after they reported positive earnings and 2011 outlook.  Both stocks have now reported earnings but the difference is that Aetna is now extremely overbought relative to Cigna.  Both companies have excellent fundamentals but I give a slight edge to CI at current levels.

I’m shorting the reactionary move in AET and getting long CI.  I prefer to trade back to the mean rather than fading moves like this but I feel that I’ve been patient in initiating the position and the spread has strong mean reverting properties.  This is a short term trade, meaning I should be out in two days or less.

Longer term, I still like this trade but I won’t be interested in committing serious position size until I see some weakness in the spread.  It’s impossible to tell where exactly this spread will top out, and picking tops is a rare event.  I like the short term risk/reward here.

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