How to structure a set of trades that would allow someone to profit from the absolute relative divergence of two different companies share price?
How can a set of trades be setup such that you profit when the price difference of two different companies diverges from one another? Lets say Company A and Company B have a share price of $10, and for the sake of keeping this simple, and lets say premiums are $5 overall. At a future date, you make a profit if:
* Company A went up and Company B went down. For example, Company A went up to $15 and B went down to $5, you make $5.
* Company B went down and Company A went up. For example, Company A went down to $8 and B went up $16, you make $1.
Now more complexly you make a profit if:
* Company A outperforms Company B and both went up. For example, Company A went up to $25 and Company B went up $15, you would only make $5.
* Company B outperforms Company A and both went up. For example, Company B up to $18 and Company A went up to $11, you would make $2.
* Company A stays flat and Company B went up. For example, Company A stays at $10 and Company B went up to $20, you would make $5.
You lose money if they both move in tandem or do not move at all:
* Company A stays flat and Company B stay flat, meaning you lose your $5 premium.
* Company A rises a little and Company B drops a little. For example, Company A goes up to $12 and Company B down to $9, you lose $2.
* Company A rises a lot and so does Company B the same amount. For example, Company A goes up to $20 and Company B goes up to $20, you lose $5.
* Company A drops a lot and so does Company B the same amount. For example, Company A goes up down to $2 and Company B down up to $3, you lose $4.
Now, what I know I can do is say if I think one will remain flat and the other one will either rise or lower, then I can take out a Long Butterfly Spread in one of the companies and a Short Butterfly Spread in the other, but what I cannot figure out is a way to do this symmetrically across both companies.
This is slightly possible to do if you already own shares in one company and you want to gain the amount of shares you have in that company. You can sell your shares in a company and take out a Short Butterfly in the other company, then converting your profits back into the original company you sold, but this is not thinking in terms of cash.