pairs trade

Pairs Trade

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.

Notes:

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.

See also: Butterfly Spread, Hedge, Long, Paired Shares, Pairing Off, Short

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pairs trade

An investment strategy that matches a short position with a comparable long position in the stock of a company in the same industry. For example, an investor might buy 500 shares of Delta Airlines and sell short a comparable principal amount of the stock of UAL, Inc. The offsetting positions allow an investor to attempt to profit by selecting the best value in an industry without worrying about changes in the valuation of the sector or the overall market.