Pairs trade
TradingDefinition
Long one stock, short a closely related stock — typically two competitors in the same industry whose prices have temporarily diverged. Bet that the spread will mean-revert. Market-neutral (long/short balance roughly cancels broad market exposure).
Classic example: long Coca-Cola, short Pepsi when KO is unusually cheap relative to PEP. Works in normal markets, fails in regime shifts (one company's fundamentals genuinely diverge from peer's).
Classic example: long Coca-Cola, short Pepsi when KO is unusually cheap relative to PEP. Works in normal markets, fails in regime shifts (one company's fundamentals genuinely diverge from peer's).