Spread Trading - Strategy & Calculation

[1sandeepgupta]

Successful spread trading in zinc and lead on paper is for the comments and suggestions of fellow members. First Bull spread is opened and squared off, The paper profit is 19000 then the second bear spread is opened. The spread sheet is attached in the thread
http://www.traderji.com/commodities/48665-calender-spreads-gold-silver.html, the name is spread trading lead zinc.xls

 

[aryabhatta]

iGuru are you still trading this strategy? There has been no updates form u since a month

For other members reading this i found a good article about spread trading

http://www.trade2win.com/section/articles/800-futures-spread-trading

 

[shyam.trivedi]

Amara Raja Batteries: Expansion to aid volume growth and replacement sales says Motilal oswal

 

[simu2004]

Any views on Zinc/Lead Hedge strategy ? Difference is close to 14.5 now ? Is it a good point to take a hedge position now or this difference is going to increase further ?

 

[Shailu]

hello,
sir,
i had seen ur exceel sheet of lead and zinc but still i didnt understand when we have to buy or when we have to sell, so it is kindly request u to explain in simple manner.
my email id is indian_smarty143@y a h o o.com

 

[judy]

iguru,

What kind of trades do you put - market or limit orders for both lead and zinc. when i put market orders, my execution does not give me the desired spread and when i put limit orders i am exposed to one leg.

 

[vai29]

Thx Guru for Sharing Such a Valuable input:thumb:

 

[PitBull]

Any views on Zinc/Lead Hedge strategy ? Difference is close to 14.5 now ? Is it a good point to take a hedge position now or this difference is going to increase further ?

I've taken a Bull Spread at 15.2. Its 16.25 now but still a bit above my stop loss. If my stop loss hits at 17.2 , I'll exit and wait for it to start closing again.

 

[ashwani chadha]

As I already discussed in my previous article Spread Trading - A Simple Trading Strategy for Maximizing Your Profits about some basics of Spread trading.

Link: http://www.traderji.com/commodities...trading-strategy-maximizing-your-profits.html

Here, I will focus on the different strategies for spread trading and to calculate how to find the spread opportunity.


But before going forward, I would like you to remember few thing w.r.t. Spread:

Do spread on Gold, Silver, Copper, Zinc and in cross commodities like Lead & Zinc. (Currently ignore any other commodities or combination of commodities....... Im working on it and will keep update on time to time.)

Never do spread in any commodities for last 7 trading days before contract expiry.

For any abnormal behaviour in spread, always check for some market news (which must have affected it) before taking the spread position.

For spread calculation use maximum 20-25 days of historical data.

Every day your spread differences keep on changing, so we need to update it on daily basis to understand the spread gap and to apply the strategies.

In spread trading, you will gain in one contract and loss in another, very rarely you find that you gain in both the contract.

Don't do spread in Gold & Silver for Dec expiry contract (As I never find a good opportunity for spread)


Now we will come to the strategy:

There are two types of strategies for Spread: Bull Spread & Bear Spread

Bull Spread
This strategy is applied when the spread gap between the two contracts (Gold Far month contract Gold Near month contract or Lead Oct contract Zinc Oct contract) is more or widen.

Bear Spread
This strategy is applied when the spread gap between the two contracts (Gold Far month contract Gold Near month contract or Lead Oct contract Zinc Oct contract) is less or narrow (gap between the two contract become Zero or negative figs.)


Calculation:

Here, Im taking the example of spread between the Lead & Zinc (my favourite one):

First take the historical data for last one month from MCX website (mcxindia.com Market Data Bhav Copy Bhav Copy Commoditywise)

Then take the spread gap between the closing price of each day (Spread Gap = Lead Closing Price Zinc Closing Price) for last one month

Take the "Average" of those spread gap of the closing prices and also the "standard Deviation" of those spread gap of the closing prices for last 20-25 days.

Now we will have two figs........ that is Average & Standard Deviation.


Now comes the final part that is the decision making and implementation of Spread strategy:

Bull Spread Range = Average + Standard Deviation

If the spread Gap > Bull Spread Range, then we will go for Bull spread strategy. It means we will Sell the far month contract or Lead contract and Buy the near month contract or Zinc contract.

Bear Spread Range = Average - Standard Deviation

If the spread Gap < Bear Spread Range, then we will go for Bear spread strategy. It means we will Buy the far month contract or Lead contract and Sell the near month contract or Zinc contract.


Important point:

I have attached an Excel file: Spread Analysis Lead & Zinc for your reference to understand the calculations.

For calculating the spread gap between the two contracts, I always subtract from Far month to near month contract for spread calculation. If you will change this calculation scenario then your strategy will also change.

For lead & zinc spread, I found that there Bull & Bear spread gap is around Rs. 2.5 to 0 even to -0.5. Any time if you find a spread gap of Rs. 4 to 5 or Rs. -2 to -3 will be a very good opportunity for spread in Lead & Zinc.

For Gold, Bull & Bear spread gap is around Rs. 140 to 80/70.

Same way you can find the spread gap for other commodities also. Continues study and watch will help you to understand the spread gaps for different commodities.

If anyone can have it live for intraday then it will be a very good opportunity to do & apply spread.


Regards,

iGuru

very well explained thanks

 

[sprintravi75]

very well explained thanks

DEAR all

if any one has the mobile/phone number of iGURU please share.

regards

ravi