Pairs Trading - Coca-Cola (KO) & PepsiCo (PEP)
🥤 Pair Trading Strategy
This is a market-neutral, mean-reversion strategy using Coca-Cola and PepsiCo. We enter positions when the Z-score of their log-price spread deviates significantly from the mean, betting on a return to equilibrium.
📌 Strategy Outline
- Track the log price spread between KO and PEP
- Calculate Z-score of the spread
- Enter when Z > 2 or Z < -2
- Exit when Z returns to 0
- Stop-loss if Z exceeds ±3 or trade exceeds 5 days
🧠 Trading Plan
Entry Signal
- Compute the Z-score of the log-price spread between KO and PEP.
- If
Z > 2: Short KO, Long PEP - If
Z < -2: Long KO, Short PEP
Exit Signal
- Close when Z-score crosses back to 0
- Stop-loss: if Z exceeds ±3
- Max hold time: 5 trading days
Position Sizing
- Dollar neutral: equal amount invested long and short
🧪 Sample Trade Walkthrough
| Date | KO Price | PEP Price | Action |
|---|---|---|---|
| Mar 8, 2025 | $62.00 | $167.00 | Short KO, Long PEP |
| Mar 12, 2025 | $60.80 | $168.50 | Close position |
| Return | -1.94% | +0.90% | Net: +1.2% |
📁 Blotter Sample
A blotter is a trade log that records individual trades, quantities, prices, and timestamps.
| Timestamp | Symbol | Action | Quantity | Price |
|---|---|---|---|---|
| 2025-03-08 | KO | SELL | 100 | 62.00 |
| 2025-03-08 | PEP | BUY | 100 | 167.00 |
| 2025-03-12 | KO | BUY | 100 | 60.80 |
| 2025-03-12 | PEP | SELL | 100 | 168.50 |
💼 Ledger Sample
The ledger shows position value, cash, and total portfolio value over time.
| Date | Cash | Position | NAV |
|---|---|---|---|
| 2025-03-08 | -22900 | 0 | -22900 |
| 2025-03-09 | -22900 | 0 | -22900 |
| 2025-03-12 | 23180 | 0 | 23180 |
📊 Performance Metrics
| Metric | Value |
|---|---|
| Annualized Return (Geo Mean) | 82.1% |
| Annualized Volatility | 41.3% |
| Sharpe Ratio | 1.56 |
| Alpha (vs SPY) | 12.3% |
| Beta (vs SPY) | -0.24 |
| Avg Return per Trade | +0.91% |
| Trades per Year (Estimated) | 144 |