|Written by GSCR Staff|
|Friday, 22 June 2012 09:06|
A paired trade is referred to a buy of one stock and simultaneous short sale, or outright sale (or close to it) of another. These stocks could be in the same industry and going in opposite directions since one stock may benefit from the woes of another. It looks like, to a degree, that is happening today with some stocks today. While it is usually used as a market neutral tool it can be very profitable but also dangerous when also used to take advantage of big moves. One way of cheaply executing paired trades that has less risk is to use options. These include buying stock and selling underlying calls, buying puts and going long another stock, or even buying puts while going long the underlying stock.
In markets that seem to have difficulty in finding direction, yet are subject to wild swings, options are a great tool, when used properly. Moreover, they are a tool frequently overlooked by retail investors.
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