Edit
I am assuming that I don't need to use margin account to short here:
What is a standard way to calculate return for pairs trading strategy? For example, I bought 100 dollars worth of a loser (L) and shorted 100 dollars worth of winner (W), and when their prices converged I sold L for 110 dollars worth, and paid 90 dollars for W. At the end I made dollars 20, but what is my return? Normally I would divide profit by investment, but here my net investment is zero, so I can't do that. It seems reasonable to count each of my 100 dollars positions as separate investments, in that case I would have:
$$ \mbox{return} = \frac{20}{100 + 100} * 100 \% = 10 \% $$
Is the above right? If not what is the proper method?
If I need to use a margin account:
Under Regulation T, it is mandatory for short trades that 150% of the value of the position at the time the short is created be held in a margin account. This 150% is comprised of the full value of the short (100%), plus an additional margin requirement of 50% or half the value of the position. (The margin requirement for a long position is also 50%.) For example, if you were to short a stock and the position had a value of \$20,000, you would be required to have the \$20,000 that came from the short sale plus an additional \$10,000, for a total of $30,000, in the account to meet the requirements of Regulation T
Then I would need to put 100 * 1.5 = 150 in the margin account for shorting a winner, and buy 100 dollars worth a loser, so my return is: $$ \mbox{return} = \frac{20}{100 + 150} * 100\% = 8\% $$
I think the above is right, but a bit unsure.
Thank You