Delta-Neutral Arbitrage

Pairs trading takes offsetting positions and expresses a view on their relative movement. The hedge ratio—not equal coin counts or equal dollars—defines the spread. Historical correlation alone is insufficient: correlated price levels can drift apart permanently, while a stationary spread can still change regime.

The trade does not completely remove market risk. Beta estimates move, correlations break during stress, legs can have different liquidity and funding, and one side can gap or become unavailable. Test stationarity and parameter stability without leakage, include both legs' costs, and define a breakdown exit rather than assuming every spread must revert.