Tom explains that when you trade futures, it’s a black or white trade similar to stocks--you either want the underlying to go up, or down. Not quite the nuance you get with options. So in order to use strategy when trading futures, you put on pairs trades. A pairs trade is a bet on the relationship, or spread, of two underlyings. It can act as a hedge against risk, and it can buy you more time to be right.
As an example, you may buy the Nasdaq and sell the S&P 500. They’re highly correlated but they move a little bit differently.
The yutes finally get a chance to put on some pairs trades of their own:
Tom explains that futures trades are more capital efficient--they require less capital than a stock trade with the same notional value--so E has tied up less of his capital than Kay has. This is why most folks don’t do pairs trades with stocks.
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