Two index prices that move together still need their spread to stay tied to count as a pair
A pair is two prices that have moved together for a long time. The trade watches their spread, which is one price less a fitted multiple of the other, and takes a position when the spread sits far from its average. It exits when the spread returns. The chart shows two index prices and the z-score of their spread, as an illustration of the method and not a recommended pair.
Correlation is only the start. The two index series above move together closely from day to day, yet the test that matters is cointegration: the spread has to stay tied over time, so a move away is pulled back. Two prices can be highly correlated and still drift apart for long stretches.
Half-life measures how long a gap usually takes to close, and it sets the lookback and a time limit. The z-score measures how far the spread is from its mean, in units of its own volatility. These are measures, not rules. A threshold for the z-score is a choice, and a pair can move well past it.
Indian rules make pairs harder. A retail account cannot easily hold a cash short overnight, so both legs are often stock futures. The lot sizes differ, which makes the hedge ratio lumpy, and an F&O ban period can block new positions in one leg. Costs fall on both legs, including STT on the futures sale at 0.05% from 1 Apr 2026.
NSE publishes prices and contract data, not a list of pairs. A list shared elsewhere is chosen from past data. If the same data picks the pairs and tests them, the result is biased, so a pair should be tested on prices it was not picked from.
Before you trade. Derivatives trading carries a high risk of loss. SEBI's study "Profitability of Individual Traders in the Equity Derivatives Segment (FY25 to FY26)" (August 2026) found that 87.7% of individual traders in equity F&O made net losses in FY26, with aggregate net losses of Rs 91,685 crore. Read the SEBI study