Trading pairs in the stock market is an advanced strategy but it can be well worth the time and effort. This trade is good for traders faced with an attractive stock investment in a poorly performing industry group. Conventional wisdom says to pass on the stock so your investment does not get dragged down with the rest of the industry. However, there are a couple of strategies that may help with this situation and make an impossible trade something very attractive. This article will cover one of these strategies called "pairs trading."
Today, H&R Block (HRB) released earnings with a very positive surprise. The firm has come a long way from a quarterly loss of $-.26 a share in the same period last year to earnings of $1.66 per share over the most recent quarter. HRB has emerged from their divestment of failed mortgage arm Option One with flying colors. However, within the same industry group there are also a lot of dogs. Does this mean that you should avoid HRB because of the sorry state of its group? Not necessarily. This is where pairs trading comes into play.
To execute a pairs trade, you buy the stock you are interested in and sell or short a stock within the same group that looks and acts much weaker. In the video I contrasted HRB with JTX, which has been a much weaker performer this year. The idea behind a pairs trade is to buy strength and sell weakness. If the group drops you have assumed that JTX will drop faster than HRB and the short position will offset those losses. Similarly, if the group rises, you have assumed that HRB will gain strength faster than JTX, which will create additional profits. Check out the video and paper-trade one of these yourself.
Today, H&R Block (HRB) released earnings with a very positive surprise. The firm has come a long way from a quarterly loss of $-.26 a share in the same period last year to earnings of $1.66 per share over the most recent quarter. HRB has emerged from their divestment of failed mortgage arm Option One with flying colors. However, within the same industry group there are also a lot of dogs. Does this mean that you should avoid HRB because of the sorry state of its group? Not necessarily. This is where pairs trading comes into play. 
