Stocks & Commodities V. 22:10 (47): Q&A by Don Bright SINCE YOU ASKED Confused about some aspect of trading? Professional trader Don Bright of Bright Trading (www.stocktrading.com), an equity trading corporation, answers a few of your questions. To submit a question, post your question to our website at http://Message-Boards.Traders.com. Answers will be posted there, and selected questions will appear in a future issue of S&C. ARBITRAGE AND VWAP For arbitrage (as with Bank One and JPMorgan Chase), you have said to use the “ratio” and “spread number” as a reference. What is the ratio? Is that the price difference ratio, or the spread ratio? Second, regarding VWAP (volume-weighted average price), suppose the price is $30, and the VWAP is $30.20. Does that mean the price is below the average-volume price? The ratio refers to the number of shares in one stock that it takes to equal 100 shares of the other. In this case, the ratio is 1.32 of JPM to 1.00 of ONE. To trade it, you would buy/sell 1,300 shares of JPM, and sell/buy 1,000 shares of ONE. Volume-weighted average price is simply that. To calculate VWAP, multiply the price by the number of shares for each trade. Add the results for all the trades and divide that by the number of shares traded. This will give you the VWAP number. The current price is either higher or lower than VWAP. VWAP is used by brokers and customers to give them a standardized price at which to buy/sell stock to each other that day. |
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