In todays volatile and sometimes uncertain markets, traders are looking for a trading strategies aims at protecting their profits while minimizing losses and managing risk. Hedging your trades using a 'Spread' is one such strategy. Commodity futures spread trading offers an exciting path for potential profits often overlooked by futures traders. Like anything else worthwhile, Commodity futures Spread Trading is not a piece of cake! Futures are a "zero-sum" game. One of my good friend says it as minus-sum game as it include brokerage & other charges in it. You don't want to be part of the "zero!" Take your time for trading. Hard work and discipline are required for trading. Learn things your futures broker never told you and perhaps never knew. Learn what the professional traders dont want you to know. Feel empowered and knowledgeable when you place your spread orders. And always remember that the Exchanges were set up for their Members, and not for you. The only purpose these professional traders/brokers have is to take as much of your money as they can from you.
So I have decided to share my knowledge of spread trading because I realize that most current traders have never been exposed to it.
A spread is defined as buying a futures contract and selling a related futures contract to profit from the change in the differential of the two contracts. In this the risk is in the difference between two contract prices rather than the risk of an outright/naked futures contract.
There are different types of spreads and different methods for using each:
Intramarket Spreads (My favourite Trading Strategy)
An Intramarket spreads are done only as calendar spreads. In this method you are long and short futures in the same market, but in different contract months. An example of an Intramarket spread is that you are Long Dec Gold contract and simultaneously Short Oct Gold contract or viceversa depending on the spread opportunity.
For Example:
The closing price on 14th Sep 2010 for Gold future Dec contract @ Rs. 19284 and Oct contract @ Rs. 19195. Spread difference between these two contract is Rs. 89 and so my Spread strategy would be that, I would have buy Gold Dec contact @ Rs. 19284 and have sold Oct contract @ Rs. 19195. On 25th Sep 2010, the closing price for Gold future Dec contract @ Rs. 19281 and Oct contract @ Rs. 19135. So on this day I would have squared off my position by selling Gold Dec contract @ Rs. 19281 & Oct contract @ Rs. 19135. So Spread difference between these two contract is Rs. 146 and my gross gain/loss from this spread trade is Rs. 57 per lot. (i.e. Rs. 57 x 100 = Rs. 5,700 per lot). My net return, assuming brokerage @ 0.01%, will be Rs. (57-14) x 100 = Rs. 4300 per lot which is nearly 10% of the spread margin for Gold.
Contract Buy Sell Return Brkg. + Other chrgs. Net Return
Gold Dec 19284 19281 -3 -7 -10
Gold Oct 19135 19195 60 -7 53
So the net return will be [ (53-10)*100 ] Rs. 4300 per lot.
This month I had applied a spread strategy on Lead & Zinc which gave me a return of Rs. 18,000 on an investment of Rs. 45,000 on two lots within 5 trading days (i.e. Return of 40%)
For Spread trading we required only 25% of margin and margin required for Lead/Zinc is around Rs. 25,000 per lot. So two lots for spread trading needs:
Lead = 2 lots x 25,000 =50,000 & Zinc = 2 lots x 25,000 =50,000
Total = 1,00,000
Total Spread margin for 2 lots = 25% x 1,00,000 = Rs. 25,000
For M2M = Rs. 20,000
Intermarket Spreads
An Intermarket spread can be done by going long futures in one commodity and short futures of the same expiry month in another commodity. For example: Short May Wheat and Long May Soybeans.
Inter Exchange Spreads (Everybody knows about it as Arbitrage Trading)
An Inter Exchange spread can be done by going long futures contract in one exchange and simultaneous short the same futures contract on another exchange in the hope the sale price is greater than the purchase price.
What makes Spread Trading such a profitable and easy way to trade?
Spreads trading is considerably lesser riskier in trading as compared with straight futures trading. Because in spread trading every position is a hedge position & trading the difference between two contracts in an Intramarket spread results in much lower risk to the trader.
Spreads on futures normally require lower margins than any other form of trading. This result in much greater efficiency in the use of your capital required for trading.
Drawbacks:
You need to put the right strategy according to your spread position else you will loss due to the contract expiry & M2M issue.
It doesnt provide an opportunity on daily basis (even if it does, brokerage issue comes in between). Once or twice in a month you will get the opportunity for spread trading on each commodity (sometimes you will not get any opportunity in a month for a commodity to do spread trading).
As a commodity futures spread trader, you will have the keys to intra-market and inter-market spreads. See yourself gaining more confidence with every futures spread trade you do. These are the basic which I explained here regarding Spread. All what you need to do is that explore more about this.
So, lets go! And do well in Spread Trading.
Spread Trading - Strategy & Calculation
Link: http://www.traderji.com/commodities/45523-spread-trading-strategy-calculation.html#post474453
Regards,
iGuru
So I have decided to share my knowledge of spread trading because I realize that most current traders have never been exposed to it.
A spread is defined as buying a futures contract and selling a related futures contract to profit from the change in the differential of the two contracts. In this the risk is in the difference between two contract prices rather than the risk of an outright/naked futures contract.
There are different types of spreads and different methods for using each:
Intramarket Spreads (My favourite Trading Strategy)
An Intramarket spreads are done only as calendar spreads. In this method you are long and short futures in the same market, but in different contract months. An example of an Intramarket spread is that you are Long Dec Gold contract and simultaneously Short Oct Gold contract or viceversa depending on the spread opportunity.
For Example:
The closing price on 14th Sep 2010 for Gold future Dec contract @ Rs. 19284 and Oct contract @ Rs. 19195. Spread difference between these two contract is Rs. 89 and so my Spread strategy would be that, I would have buy Gold Dec contact @ Rs. 19284 and have sold Oct contract @ Rs. 19195. On 25th Sep 2010, the closing price for Gold future Dec contract @ Rs. 19281 and Oct contract @ Rs. 19135. So on this day I would have squared off my position by selling Gold Dec contract @ Rs. 19281 & Oct contract @ Rs. 19135. So Spread difference between these two contract is Rs. 146 and my gross gain/loss from this spread trade is Rs. 57 per lot. (i.e. Rs. 57 x 100 = Rs. 5,700 per lot). My net return, assuming brokerage @ 0.01%, will be Rs. (57-14) x 100 = Rs. 4300 per lot which is nearly 10% of the spread margin for Gold.
Contract Buy Sell Return Brkg. + Other chrgs. Net Return
Gold Dec 19284 19281 -3 -7 -10
Gold Oct 19135 19195 60 -7 53
So the net return will be [ (53-10)*100 ] Rs. 4300 per lot.
This month I had applied a spread strategy on Lead & Zinc which gave me a return of Rs. 18,000 on an investment of Rs. 45,000 on two lots within 5 trading days (i.e. Return of 40%)
For Spread trading we required only 25% of margin and margin required for Lead/Zinc is around Rs. 25,000 per lot. So two lots for spread trading needs:
Lead = 2 lots x 25,000 =50,000 & Zinc = 2 lots x 25,000 =50,000
Total = 1,00,000
Total Spread margin for 2 lots = 25% x 1,00,000 = Rs. 25,000
For M2M = Rs. 20,000
Intermarket Spreads
An Intermarket spread can be done by going long futures in one commodity and short futures of the same expiry month in another commodity. For example: Short May Wheat and Long May Soybeans.
Inter Exchange Spreads (Everybody knows about it as Arbitrage Trading)
An Inter Exchange spread can be done by going long futures contract in one exchange and simultaneous short the same futures contract on another exchange in the hope the sale price is greater than the purchase price.
What makes Spread Trading such a profitable and easy way to trade?
Spreads trading is considerably lesser riskier in trading as compared with straight futures trading. Because in spread trading every position is a hedge position & trading the difference between two contracts in an Intramarket spread results in much lower risk to the trader.
Spreads on futures normally require lower margins than any other form of trading. This result in much greater efficiency in the use of your capital required for trading.
Drawbacks:
You need to put the right strategy according to your spread position else you will loss due to the contract expiry & M2M issue.
It doesnt provide an opportunity on daily basis (even if it does, brokerage issue comes in between). Once or twice in a month you will get the opportunity for spread trading on each commodity (sometimes you will not get any opportunity in a month for a commodity to do spread trading).
As a commodity futures spread trader, you will have the keys to intra-market and inter-market spreads. See yourself gaining more confidence with every futures spread trade you do. These are the basic which I explained here regarding Spread. All what you need to do is that explore more about this.
So, lets go! And do well in Spread Trading.
Spread Trading - Strategy & Calculation
Link: http://www.traderji.com/commodities/45523-spread-trading-strategy-calculation.html#post474453
Regards,
iGuru
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