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Safety In Pairs

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.
















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Trader disclosure: On June 26, 2008, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Adami Owns (AGU), (BTU), (C), (GS), (INTC), (MSFT), (NUE); Finerman Owns (GS); Finerman's Firm Owns (MO), (MSFT), (PM), (SUN), (TSO), (VLO), (AXP), (DVA); Finerman's Firm Owns SPX Index Puts; Finerman's Firm And Finerman Own (C) And (C) Leaps; Finerman's Firm Is Short (IYR), (IJR), (MDY), (SPY), (IWM); Najarian Owns (AAPL), (ANR), (CHK), (RIMM), (TSO), (XLF); Najarian Owns (MER) Puts; Najarian Owns (NUE) Calls, (QID) Calls, (SLB) Calls, (YHOO) Calls; Terranova Owns (BNI), (CME), (FXC), (LUV), (GOOG), (INTC), (IYT), (XLF), (SU), (YHOO), (FCX); Terranova Owns Dollar Index Futures

Terranova is chief alternatives strategist at Phoenix Investment Partners;; Phoenix Investment Partners Ltd. Owns (RWX), (DBC), (DBV), (IGE), (AAI), (ALK), (AMR,) (APA), BP plc, British Airways plc, (CHK), (CVX), (COP), (CAL), (DAL), ENI SPA, (XOM), Gazprom, (HA), (HES), (HOC), (HSE), (JBLU), Lukoil, (MRO), (MUR), (OXY), Petrobras Intl Fin, Petro-Canada, (PBR), Petroleos De Venezuela, (QAN), (RJET), Royal Dutch Shell plc A Shares, (SKYW), (LUV,) (SU), (TSO), Texaco Capital, Total SA, (UAUA), (LCC), (VLO)