When we are in a low volatility environment and we want to reduce our risk exposure, we can place a pairs trade. However due to the different prices of the underlyings and the way that they react to market movements, how do we what the appropriate ratio to trade is?
Today, Tom Sosnoff and Tony Battista discuss how you can find the correct ratio when looking to place a pairs trade. Not only can you trade based on an equivalent buying power for each underlying but you can also incorporate volatility and beta. This will allow you to put more context around how the underlyings will move with the market and give you an idea of how to adjust your ratio of shares accordingly!