Trading Strategies · CFDs Trading Guide

A long position in one company and a short position in another can reduce some shared exposure. It does not automatically create a market neutral or low risk trade.

Explain the relationship

A pairs idea requires a reason to compare the two assets, such as similar business drivers or a documented relative valuation question. A chart that once moved together is not enough. Corporate changes, debt differences or a takeover can alter the relationship permanently. A divergence is an observation, not proof of mispricing.

Distinguish equal dollars from equal sensitivity

Buying $10,000 of one share CFD and selling $10,000 of another creates zero initial net notional. If the first has market beta 1.4 and the second 0.8, estimated market sensitivity is still positive. Equal capital amounts do not offset sector, currency, liquidity or company specific risks either.

Calculate both legs

Suppose the long gains 2%, producing $200, while the shorted share rises 3%, producing a $300 loss. The pair loses $100 before commissions, funding and borrowing. Two positions create two execution paths and possible delays. A profitable spread on a midpoint chart may be difficult to capture after trading costs on both sides.

Set a relationship based exit

Specify what would invalidate the relative thesis, a maximum duration and a cash loss limit. Test whether the hedge ratio is stable rather than fitting it perfectly to the past. Record the risk that one leg becomes unavailable or is closed by the provider. A partially executed pair becomes a directional position until the other leg is resolved.

Try it yourself

A $10,000 long has beta 1.4 and the short asset beta is 0.8. What short notional would offset estimated broad market beta under this simplified model?

Show the worked answer

The estimate is $10,000 × 1.4 / 0.8 = $17,500 short. This offsets only the assumed beta exposure. It leaves model, company, financing and execution risks.

Further reading

Educational material, not a recommendation to trade. Numerical examples are hypothetical. CFDs involve leverage and substantial risk of loss. Availability, costs and protections depend on the contract, legal entity, jurisdiction and client classification.

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