This article originally appeared on Traders Reserve . They say the best things
come in pairs, and while there are a variety of strategies traders can use to
take advantage of this volatile market, one of the best is whats known as pair
trades. The latest bout of market volatility has left many traders scratching
their heads and wondering which way the market is headed next. One day we see
the Dow surge 200 points on strong jobs report expectations, the next day stocks
plummet on surging oil prices and an intensification of violence in Libya. The
swings are enough to paralyze most traders; however, this kind of volatility
doesnt have to stifle your trading. What is Pair Trading? Basically, a pair
trade is a strategy of matching up one long position in a stock with a short
position in another. The key here is to be long a stock you suspect will
outperform the market even while the general market is suffering from extreme
volatility. The second component here is to be short a stock that is likely to
underperform the market during periods of wild flux. Although there are many
variations on the pair trade theme, one style of trading is to be long a stock
and short a stock that come from the same sector. This strategy of pair trading
essentially involves picking a leading stock in a specific sector and going
long, while also shorting the laggard stocks in the same space. Lets take a look
at three pair trades that do just that. Long Dell, Short HP In the personal
computer space, theres been a distinct divergence of late between rivals Dell
Inc. (NASDAQ: DELL ) and Hewlett-Packard (NYSE: HPQ ). Last month, Dell
announced earnings that crushed Wall Street expectations, and the recent upbeat
numbers have been recognized by traders. DELL shares are up nearly 15% over the
past three months. By comparison, HP shares are up just a sliver (0.4%) in the
past three months. Though the HP did best earnings expectations in its most
recent quarter, its rather lackluster profit forecast gave traders a reason to
sell. This pair trade is long DELL and short HPQ.
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