Pairs trading
Buying one security and selling a related one at the same time, betting on their diverged prices converging rather than on the market going anywhere.
How to read the number
The outcome is driven by the spread between the two, so a general rally or sell-off affects the position weakly: it was designed as a bet on relative valuation.
When the metric lies
The link between the pair rests on history and can end for good — a change of owner, a trading restriction, a reorganisation. The short leg needs borrowed stock, and its price and availability move more violently in stress than the quotes do.
Also known as: relative value pair