The Secret of Reduced Market Spreads

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Joe Ross

05 Jan, 2005

in Commodities and 1 more

One of the best kept secrets in trading is that of reduced margin spreads.  You cannot name a trading method that provides more safety or a greater return on margin than does a reduced margin spread, while also being one of the least time-consuming ways to trade. Have you ever asked yourself why it is that many of the largest, most powerful traders trade spreads? I’m going to show you why!

What is a reduced margin spread?

Because of perceived lower volatility, exchanges grant reduced margins on certain types of spreads. Spreads consist of being long in one or more contracts of one market and short in one or more contracts of the same market but in different months—an intramarket spread; or being long in one or more contracts of one market and short one or more contracts of a different market, and in the same or different months—an intermarket spread.

Distortions about spreads

There are some distortions about spread trading that need to be dispelled.  If we get them out of the way, I can show you the tremendous advantages spread trading has over any other form of trading.

It is said that spreads do not move as much as outright futures.  I agree 100% with that statement.  However, spreads trend much more often than outright futures, they trend much more dramatically than outright futures, and they trend for longer periods of time than do the outright futures.  For these reasons you can make much more money with spreads than with the outrights.

The second distortion about spread trading goes like this:  “You have to pay double commissions when you trade spreads.”  Yes!  You have to pay two commissions for every spread you enter in the market.  So what?  You are trading two contracts instead of one. You pay two commissions because you are trading two separate contracts, one in one place and the other in an entirely different place.  Paying two commissions for two separate trades is hardly unfair.  Let me tell you what is unfair—paying a round turn commission for an option that expires worthless. Why don’t you hear people complaining about that? You pay for a round turn, and you receive only half a turn. Doesn’t make a lot of sense, does it?

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Financial instrument spreads

Hi Joe
Do spread slike Calnder on E mini S&P 500 move at all?

For calender spreads is it important to have a trading platform / broker which is co located at the exchnage or it does not matter ( I know for synthetic spread scalpinng it does mater)
Alos you mentioned daytrade stock index spreads? is that really viable?

Sep 09, 2012

Member (532 posts)

This is certainly an interesting read and its something I seem to have covered in alternative investment course work some time last year; Its time to check it out again.

Jan 06, 2009

Member (25 posts)

Interesting. Would you be able to tell us a little more about your experiences that would help to validate your post? Which markets did you trade, when and how? What was it about the JR advice or the info available from Moores that lead you to take losing trades?

Your reminiscences would be much appreciated.

FN

May 05, 2005

Member (305 posts)

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