Pairs Trade

DEFINITION of '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.

BREAKING DOWN 'Pairs Trade'

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 TERMS
  1. Equity Market Neutral

    A hedge fund strategy that seeks to exploit differences in stock ...
  2. Short Hedge

    An investment strategy that is focused on mitigating a risk that ...
  3. Cross Hedge

    The act of hedging ones position by taking an offsetting position ...
  4. Selling Hedge

    A hedging strategy with which the sale of futures contracts are ...
  5. Hedge Fund

    An aggressively managed portfolio of investments that uses leveraged, ...
  6. Delta Hedging

    An options strategy that aims to reduce (hedge) the risk associated ...
Related Articles
  1. Investing Basics

    Hedging Risk for Beginners: How and When to Do It

    Hedging risk is always a good idea. Here is how sophisticated investors go about it.
  2. Mutual Funds & ETFs

    Top-Down Analysis: Finding The Right Stocks And Sectors

    The top-down investment strategy depends on economy and market strength. Find out what you should know before jumping in.
  3. Options & Futures

    For Maximum Market Returns, Get Creative With Hedges

    Proper hedges help to contain your losses while still allowing profits to grow.
  4. Markets

    Hedging With Puts And Calls

    This trading strategy can reduce your risk - but only if you use it effectively.
  5. Investing Basics

    Why You Should Never Short a Stock

    Short selling a stock means you are betting on the stock decreasing in price. Before taking on this investment, you should fully understand the risks
  6. Term

    A Beginner's Guide To Hedging

    Hedging is a practice every investor should know about.
  7. Options & Futures

    Hedging Basics: What Is A Hedge?

    This strategy is widely misunderstood, but it's not as complicated as you may think.
  8. Active Trading Fundamentals

    Short Selling: The Risks

    Now that we've introduced short selling, let's make one thing clear: shorting is risky. Actually, we'll rephrase that. Shorting is very, very risky. It's not unlike running with ...
  9. Options & Futures

    A Beginner's Guide To Hedging

    Learn how investors use strategies to reduce the impact of negative events on investments.
  10. Economics

    3 Ways To Tell If Your Stock Has Bottomed

    No one can call stock bottoms with absolute certainty, but there are some common trends that appear when stocks are about to hit bottom.
RELATED FAQS
  1. What's the difference between a long and short position in the market?

    Understand long and short positions for stocks and option contracts; combine long and short positions for added leverage ... Read Answer >>
  2. How can I use equity options to protect my stock portfolio from downturns?

    Learn about stock options, how to use them to hedge stock positions and how they could help to protect stock portfolios from ... Read Answer >>
  3. How do hedge funds use short selling?

    Learn how hedge funds use short selling to profit from stocks that are falling in price. Explore different analytical techniques ... Read Answer >>
  4. What is a cross hedge?

    Cross hedging is when you hedge a position by investing in two positively correlated securities or securities that have similar ... Read Answer >>
  5. What techniques are most useful for hedging exposure to the telecommunications sector?

    Learn about option strategies used to hedge a long stock position in the telecommunications sector, including bear put spreads ... Read Answer >>
  6. If I use hedging as a risk strategy, do I have to keep my eye on my portfolio all ...

    Understand the concept of hedging and learn how this key element to portfolio management can help an investor protect profits ... Read Answer >>
Hot Definitions
  1. Reverse Mortgage

    A type of mortgage in which a homeowner can borrow money against the value of his or her home. No repayment of the mortgage ...
  2. Labor Market

    The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. ...
  3. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  4. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  5. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  6. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
Trading Center