Half-Life =- ln(2)/theta
where theta is the estimate of the rate of mean-reversion. The half-life of a spread has two main purposes. First it can be used to determine whether or not to enter a spread. We prefer spreads with a half lives under 50 days. There are no real rules for this however and if you don’t mind holding positions for a longer period you can use a longer half life. Half life can also be used to determine the holding period for a mean-reverting spread. In other words it can be used as a stop loss criterion. If a spread hasn’t hit its exit target within the period given by the half life, the trader would exit the trade. Again there is no rule that says a trader has to exit a position at the end of the half life, but it is a useful indicator as to whether the relationship between the two securities has changed.