here is a page on investopedia that talks about it...maybe it will help. http://www.investopedia.com/articles/trading/04/090804.asp
Actually it is not BUYING 2 stocks at once, it is buying one stock and shorting the other. The purpose is to make money, yet more commissions are a reality. The theory is you get dollar (market neutral) and take some risk out while you wait for statistical probabilities to work in your favor. It is not an easy trade by any means. a lot of preparation is needed to attempt this trade. You need to know fundamentals of each stock, ex divi dates, earning dates, as well as technical levels on each side of the pair. Also must have the capital and stomach to wait out the eventual reversion to mean, unless you are playing the opposite.
Even I know its not buying two shares at once get it right or get off the subject all your uninformed comments do is confuse people.
Here is a very good basic explanation of pairs trading http://en.wikipedia.org/wiki/Pairs_trade While the strategy does seem sound the problem is finding the pair of stocks, which is much easier said than done. Another problem is that past performance isn't indicitive of future results. A lagging stock may continue to lag in spite of the widening pair gap.
I day trade pairs very successfully using a Tradestation Plugin from: Its is a very simple but powerful indicator. Its has alerts that tell you when to get into a trade as well as when to get out. It even comes with a list of 25 pairs that are highly correlated and have heavy volume. The developer answers emails very fast to any questions you might have. Its is sold directly from the website or on Ebay. The ratings and comments on Ebay are very positive.
DB wrote: Well who is it, then; obviously someone who's part of your organization? You're a smart, ex-options trader -- why don't you go into an explanation of how one adjusts pair postions relative to the greeks. I know we can deal w/ getting delta-neutral, but then what? Please -- for my own edification...
I've been doing some fx in the last week, and I think I might switch completely to fx. It can be done intraday, but asking that doesn't really make sense because its a 24/7 market..so your days last as long as you can stay awake. Look at usd/jpy .. i missed that big spike up because i was asleep (i went to bed at 3am). It can be complicated it you make it that way. I only use math with stop losses..thats it.
Well, if you really want to know, we concern ourselves primarily with $$ hedging values after determining the bias of the pair based on fundamentals among other things. We then track the Average trading range over several time frames, to determine the type of pair (we use A, B, C, D, and E categories that tell us "buy zones, sell zones, and neurtral zones, and if the pair is a frequency pair (C), a Value bias (generally, A and B), do enough homework to prevent being short primary takeover targets, market shifts, etc. We tend to be 10% $$ long to compensate for the market's normal annual bias, which gives us room when shorts go up. If a pair changes it's ratios, based on pricing movements, we adjust by simply buying or selling the appropriate number of shares to compensate. This may change the overall long/short ratio, which we then "add" to our portfolio watcher. For example, we may start a pair off at 1:1, then adjust when it might be 5:4, and keep both historicals and possibly even positions. We then "roll over" from the older ratio to the new, adjusted ratio. We use our own determining factors in our daily/weekly analysis, in lieu of having to worry about delta/gamma/beta/theta, and all the rest, which apply to derivatives of course. Just a quick overview, and as you can see, there is a lot of homework involved (thank goodness for PairCo keeping a gigantic database, which is updated daily, LOL). Collecting interest on the short stock compensates for the long stock, keeping the cost of carry pretty cheap. We "day" trade some pairs (C pairs, generally, but will go in and out of other categories if price levels are triggered on the PW). By having pretty elaborate spread sheets, an individual can actually manage over 100 pairs, as my brother does. This is a fluid process, as most trading is, constant tweaking is always helpful as conditions change. Don