See the Update on this blog post at the end.
Since closing 2 pairs trades this week, my stable for this type of trade was looking quite thin. So I whipped out one of the tools I use – the Correlation Tracker - and looked for a stock that would be a good pair to NFLX (Netflix Inc.).
I bring you STMP (Stamps.com Inc). Here is a snapshot of the correlation between the 2 stocks:
As you can see, there is a massive range between the two stocks that can be played for some mean reversion. Based on closing prices today, January 20, 2012 you can consider the following trade:
1) Short 4 lots of STMP at 30.31
2) Long 1.2 lots of NFLX at 100.23
For those that prefer the Options approach, consider this trade:
1) Long the February 30/25 Put spread for $1.50 on STMP
2) Long the February 105/115 Call spread for $3.00 on NFLX
Update: The long NFLX portion of this trade has stopped out for me (2/10/2012), but the short STMP portion has remained. The stock is testing some support from mid-December 2011 so be mindful of this if short.