In his research call, Goldman Sachs analyst William Tanona recommended a "paired" trade in which investors shortCitigroup, betting on a decline, and buyMorgan Stanley which he thinks is better positioned.
Is a long / short strategy such as the one mentioned above the right trade in this market?
I recommend pairs trading with a theme, counsels Joe Terranova. I had a trade on in which I was long JP Morgan and short consumer finance bank Capital One . My theme is a belief that consumer finance will struggle more than the big capital markets names.
But don't go into a pairs trade thinking it minimizes risk. According to Karen Finerman it could make the downside worse.
And I only do it if I have a thesis, she says. For example, if I thought Nokia could win market share from Motorola then I might put on a pairs trade. But otherwise, no.
You need to know what you’re rooting for, adds Guy Adami, and when you have pairs trades on it can get confusing. I’m with Karen, I don’t think pairs trades really mitigate risk.