Its time to lock in gains and begin to close the trade.
The objective of this pair trade was to have a market neutral, net zero cost, reduced directional volatility, easy and straight forward way of betting against Chinese tech equities on further Chinese gov control actions (particularly tech focused), while maintaining US tech equity long exposure. Index ETFs (QQQ: Nasdaq100 / CQQQ: China tech) remove the single stock headline volatility single day double digit short squeeze risk, while providing significant enough movements to matter (as foreign investors in particular will go from stock picking which names will be at risk → indiscriminate broad based sector wide selling).
It seems that has been playing out quite well. Since inception, if you were just short CQQQ, you’re up 15% as of Mon close but took massive risk with unlimited downside exposure. If you just were long QQQ, you’re up about 4%, not bad for 1 month on an index. And if you were long QQQ funded by proceeds from short CQQQ, you would be zero cost out of pocket +23%, outperforming just being short CQQQ by 8% and just long QQQ by 19%.
You were also able to avoid drawdowns, which takes the psychologically driven emotional trading out of it and allowing you to keep the position on. For example, if you were just long QQQ opened on July 1, and enjoying a +3% gain by mid July - then on Mon July 19 when markets globally were deeply red and... (More)