Pairs Trade

What does it mean?
The strategy of matching a long position with a short position in two stocks of the same sector. This creates a hedge against the sector and the overall market that the two stocks are in. The hedge created is essentially a bet that you are placing on the two stocks; the stock you are long in versus the stock you are short in.

In Other Words...
It's the ultimate strategy for stock pickers, because stock picking is all that counts. What the actual market does won't matter (much). If the market or the sector moves in one direction or the other, the gain on the long stock is offset by a loss on the short.

Related Links
Trading the Odds with Arbitrage - Profiting from arbitrage is not only for market makers--retail traders can find opportunity in risk arbitrage.

Related Terms
Butterfly Spread | Hedge | Long | Paired Shares | Pairing Off | Short

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