Pair Trading is ideally a Market Neutral strategy which takes advantage of short lived discrepancy between the prices of two close substitutes.The strategy works well regardless of the market direction. The same theory could also be extended to form a portfolio of stocks of size greater than two which leads to diversification and hence reduction of risk.

Delta measures how much an option’s price changes when the underlying security’s price changes. A delta-neutral portfolio balances the response to market movements for a certain range to bring the net change of the position to zero. The portfolio makes money when the Implied Volatility of the underlying asset declines.

The general idea for this strategy is that the high and low prices of the stocks are temporary and the stock’s prices in a long run tends to have an average price. This strategy involves identifying stocks or other securities whose recent performance has differed greatly from their historic performance.