There might be two shares out there which have a excessive correlation relationship. This might be as a result of they're in the identical business and are traded in the identical market, therefore affected by many elements the identical method. Given the excessive correlation between such a pair of shares, you will see that every time there's a hole between them it can shut quickly after. The hole may be attributable to the weakening of 1 inventory briefly. The primary process right here is to determine the hole.
After figuring out the hole, you can purchase the decision choice for the inventory that's weak or a put choice for the asset if the inventory increased in value is sure to come back down. Finally, the 2 property will come to the correlation path and that must be the ‘level of exit’.