Pairs Trading

Pairs Trading is a strategy that consists of buying one stock in a given industry, and selling short another stock, usually in the same industry. The strategy seeks to identify two companies with common characteristics (eg Coke and Pepsi) whose prices are trading out of line with eachother – trading outside of their historical trading range. The undervalued stock is bought while the over valued stock is sold short. Pairs trading can be described as a market neutral strategy.