Relative Value

Investors or traders seeking to benefit from so-called relative value will seek to benefit from (arbitrage) price differences between financial instruments that are highly correlated, buying and selling a chosen pair of securities at the same time. The essence of relative value is the belief that one security in the pair is mispriced relative to the other, that the mispricing is temporary, and that the true relationship between the pair will revert. Practically, this means shorting a security that is trading rich and going long a security that is trading cheap and closing out when prices converge.