Pairs trade

Correlated names move together — usually. When one prints strong earnings and rallies but the other lags, the spread mean-reverts within days as analysts update peer models. Examples: NVDA prints great → AVGO/MU catch up; ULTA prints great → SBH closes the gap; JPM beats → BAC follows.

Setup

• Find the pair: Two names in the same sub-industry with 60-day return correlation > 0.7.
• Trigger: Pair's return spread hits a 2σ extreme on the day of one company's earnings report.
• Direction: Long the laggard, short the leader.
• Sizing: Equal DOLLAR exposure on each leg, NOT equal share count. Use beta-weighting for cleaner neutrality.
• Exit: Spread reverts to mean (typically 3–10 sessions), or stop out at 3σ extension.

Risk controls

• Avoid pairs where the laggard has its OWN earnings within 10 sessions — adds a second binary event.
• Correlation breaks under stress. Cut if VIX spikes >30 — pairs uncorrelated regime.
• Watch sector ETF flow. Pair trades fail when the whole sector is being dumped or bought wholesale.
• Borrow check: short leg must have stable, cheap borrow. Hard-to-borrow names torpedo the trade.

Common pairs

• Big banks: JPM / BAC, GS / MS, C / WFC
• Semis: NVDA / AMD, AVGO / MRVL, AMAT / LRCX
• Megacap tech: MSFT / GOOGL, META / SNAP
• Retail: WMT / TGT, COST / BJ, HD / LOW
• Airlines: DAL / UAL, AAL / LUV