Best Thread Spreads Trading

[FTSE Beater]

Hi All

I've set this thread up to enable anyone new to trading spreads (me included) to ask questions.

Someone has asked me what is a spreads trade. I think Joe Ross explains it better.

http://spread-trading.com/]What[/url] is a spread?

A spread is defined as the sale of one or more futures contracts and the purchase of one or more offsetting futures contracts. A spread tracks the difference between the price of whatever it is you are long and whatever it is you are short. Therefore the risk changes from that of price fluctuation to that of the difference between the two sides of the spread.

The spreader is a trader who positions himself between the speculator and the hedger. Rather than take the risk of excessive price fluctuation, he assumes the risk in the difference between two different trading months of the same futures, the difference between two related futures contracts in different markets, between an equity and an index, or between two equities.

For example, a spreader might take the risk of the difference in price between August Soymeal and December Soymeal (see picture below), or the difference in price between December Kansas City wheat and December Chicago wheat, or between the strongest stock in a sector and the weakest stock in that sector.

Example: Long August Soy Meal (SMQ)
and Short December Soy Meal (SMZ)

A spread trader can just as easily trade the difference between MICROSOFT and IBM (see below). Or he can trade the difference between two Exchange Traded Funds.

Example: Long Microsoft (MSFT)
and Short IBM (IBM)

Free free to ask any questions here.

 

[Dow Trader]

For example, a spreader might take the risk of the difference in price between August Soymeal and December Soymeal (see picture below.

I am puzzled by your example!, say you go short on AUG and LONG on DEC, surely is it not a case of no profit - as the movement in price action will be reflected in the futures contract!

Please help as i often see many such trades, but fail to understand how you can make money! I recently got this trade recommendation : and i am confused!
*** Trade recommendations

Trade 1:

Soybean - S
Margin:$2,565 Spread margin: $605

Spread Trade: Sell SQ5 (Aug'05) Buy SU5 (Sep'05)

 

[mik1973]

Ok Folks,

I just want to know if my understanding of spread trading is correct and give an example of how a potential trade could be made using a Spread Bet-(if it is correct).

(First point i need to clarify is this-- IS A SPREAD TRADE THE SAME AS A PAIR TRADE?- ie. 'betting on the price difference of two financial instruments?)


Lets just say i'm confident (hopeful) that the Dow will out perform the FTSE:

I take a Long position on the DOW at £1 per point (I buy at 10505)

In order to gain the same exposure on the FTSE i sell at 4890 for £2.15 a point (10505/4890=£2.15 rounded)

At the days close the dow Closes at +37 (x£1) = gain £37
The FTSE closes at +10 therefore i lose on this position 10x £2.15= -£21.50

Net Gain for day is £37- 21.50=£15.50

(The above calculations take into account any spreads)

More Questions
Would i be correct in not employing any kind of stops (as this is a hedging trade one position should offset the other)

Would the example i have given be feasible for spread betting purposes?

Are my calculations correct for placing appropriate amounts on each instrument?


Thanks in advance for any help you can offer regarding this.

Cheers,

Mick

 

[-oo0(GoldTrader)]

Everything is a spread against something.

Aloha Dow Trader,

For example, a spreader might take the risk of the difference in price between August Soymeal and December Soymeal

Actually we are not taking the “Risk of the difference,” We are taking the risk of the “Change,” in the difference between the long and short sides of the spread.

I am puzzled by your example!, say you go short on AUG and LONG on DEC, surely is it not a case of no profit - as the movement in price action will be reflected in the futures contract!

For convenience we always give the long side first. In that way our chart goes up with our account balance. So we are always taking the bullish side. If you want to short a spread you switch the contracts and go long. Always long.

Please help as I often see many such trades, but fail to understand how you can make money!

O.K. lets say you go long one month and short another. If nothing in the world changes during the duration that you hold the spread the differential between the two should remain the same. What you think you might lose on time value or something on one, you will be paying on the other.

But suppose something does change. Say a baby is born in China or a person dies in the East Indies, Maybe interest rates change in Mongolia, or a flood in Spain. If anything at all changes. Then the question is, will it affect both contracts exactly the same. If it affects them differently you might have a trade. When your research department advises you that over the last 15 years these unknown forces have resulted in reliable changes in the same direction. Then you are looking at a seasonal tendency.

There are various relationships but in essence you want to gain more on one than you lose on the other. Everything is a spread against something anyway. It could be currency, could be something weaker than currency.

I recently got this trade recommendation: and I am confused!

I am confused too. Was this person a friend?

I hope you are not taking advise from a broker.

First let me address the good faith deposit part of the quote.

Margin: $2,565 Spread margin: $605

This means if you buy one naked contract the exchange needs $2,500.00 to cover there part of the risk, but if you spread-um, they only require $600.00

Why do you suppose that is?

Spread Trade: Sell SQ5 (Aug'05) Buy SU5 (Sep'05)

What I mean is the months are two close together to be any good. If you had six to eight weeks between them there might be a chance to gain from abnormalities in the market. This time of year you should be looking at long August and short maybe January. A trade like that you can ride into the middle of July.

Suppose you put on a spread and most of the movement is in your favor on the long side and the short side closes about even. You might have slightly more gain on a naked outright, but look at the return on margin. Profits are almost four times greater with the spread.

As long as you are both long and short the same future, any shock to the market, even limit moves, is neutral to your account. On the positive side the Bean spread is in an uptrend. I would not touch it without looking at a seasonal.

 

[Mohican]

hi guys,

I'm new to trading and like to ask since spread trade equate lower returns due to lower risk, what the shortest timeframe for one to hit a million mark? If one start say 5k...

 

[Mattybuoy]

Please note I am a newbie

It seems to be that the essence of any form of Spreads Trading (or Pairs Trading) is to employ high leverage with low risk. That is why you take opposing positions on related instruments, in order to hedge out the market risk and just seek to prove whatever theory it is that you have about something.

Although the raw return may be lower compared to an outright position, because of the lower margin requirements you may actually be making more. Assuming things go to plan that is ...

I believe this was the methodology of the original long-short US hedge funds back in the 30s or whenever it was. That was applied to stocks rather than futures though.

 

[-oo0(GoldTrader)]

Rom

Rom
Hybrid Thread
Return on margin (Rom), is the thing. The raw return on spreads is unlikely to be lower than the return on naked futures per dollar risked.

Although the raw return may be lower compared to an outright position, because of the lower margin requirements you may actually be making more. Assuming things go to plan that is ...

.

 

[drewfus31]

hi guys,

I'm new to trading and like to ask since spread trade equate lower returns due to lower risk, what the shortest timeframe for one to hit a million mark? If one start say 5k...

If you treat the markets like a casino, you will get the same result. Seek knowledge, seek consistency, seek good returns.


Spread Traders Live to Trade Another Day!

 

[Songoku]

You need to balance both legs of the spread in terms of volatility (i.e which moves more) and take into account differences in currency if that is an issue (i.e. German Bund against UK Gilt ratio is currently 7:5).

Spreading can be just as risky as outright trading in some respects, although it will protect against overall market risk in some cases, and the money can be just as large if you size your position appropriately.

Massaging your position by getting in and out of one of the legs can improve your position, although market moves can catch you unawares when you only have one leg on.

You can chart the spread for support and resistance etc and bring a technical aspect to it, or rely on the fundamentals which are what really cause the spread basis to actually change. Often products with close relationships are watched to see if the spread goes temporarily out of line, and a position can then be taken with a view to the spread returning to its 'normal'/recent value etc.

 

[prasi]

hi,
I am a new user and I m from India.Can someone help me to trade in spread for Indian market with online support

 

[-oo0(GoldTrader)]

Cbot

I am a new user and I'm from India.

Sure! How can we help.

Can’t you open an account and trade using email?​

 

[Paulds11]

Hmmmm...

It seems to me that all newbies should start trading Spreads in Futures after much reading and analysis of Seasonals.. please correct me if my stamen ts are ridiculous or need updating.

It also seems that the reduction in margin requirement can improve the number of spread trades that can be entered.. well actually no need is there.. just increase the number of contracts each side of the spread.

My questions though are as follows?

How do you easily track the profit from the trade in Real-Time in order to assure yourself you have the correct ORIENTATION for a spread?? ie Long and Short which side of the calendar spread!!

Also in Intramarket Calender spreads I can see now that if the markets roughly follow each other there is chance of scalping because the closest month will surely react quicker to market changes and will generally lead the far month correct?

Also how on earth then do you ENTER a SPREAD without legging into it?
How then do you chart the spread because I cant see how that is done (Im sure Im being a silly newbie here.. so please any assistance appreciated)

I have awoken to Spreads as a result of a chance encounter with a very successful piece of Futures Institutional software called X_Tradrer hitherto unknown and after looking at a demo.. something huge sparked in me.. this surely is one of the edges institutional traders have over retail clients surely?

Discuss (30 Marks)

 

[fibonelli]

Hi Paul,

One of my other trading strategies will be spread trading. This strategy I've earmarked to learn this September. I like the idea of margin concessions and of non directional trading.

Joe Ross's website seems to be good for newbies.

http://www.spread-trading.com/

Good luck

Fibonelli

 

[Paulds11]

Fibonelli.. yes seen that one.. Theres something going on here isnt there..!.. I can smell something interesting.... and rather clandestine going on

I happened across X-Trader software just to see what some of the pros and institutions are using, thought it was just another obscure tool..then I watched the demos and noticed the absolute focus on order entry and spreads in Futures hmmm .. how popular is this software? I thought

So then I decided to look more closely at who exactly is using this software.. and BANG!! WTF? man! ... GNI, Goldmans, BNP Paribas, Daiwa Bear Stearns and many others some with Worldwide licensing agreements!!!! thats the biggest hint Ive ever had about whats going on...

OK just read more about it, spreads are HUGE huge huge in the institutions and mathematically they arnt neccesarily concerned with up or down markets.. only changes in spreads!!.. for even less margin!!!.. thats thier edge...my decision is made.. My Focus is definitely a primary trading in Futures and Options spreads...phew.. thats narrowed it down a bit (so much choice.. almost too much choice)

Suddenly everything is making sense

 

[-oo0(GoldTrader)]

Rom & Moc

It also seems that the reduction in margin requirement can improve the number of spread trades that can be entered..

Return on margin is the measure.

How do you easily track the profit from the trade in Real-Time

You cannot keep track in real time. Pretty much close only. You have to have simultaneous trades.

and will generally lead the far month correct?

Why do you think that?

Also how on earth then do you ENTER a SPREAD without legging into it?

M.O.C.

How then do you chart the spread

Long over short.

What the institutional traders have over retail is Moore Research.

GT

 

[fibonelli]

Fibonelli.. yes seen that one.. Theres something going on here isnt there..!.. I can smell something interesting.... and rather clandestine going on

I happened across X-Trader software just to see what some of the pros and institutions are using, thought it was just another obscure tool..then I watched the demos and noticed the absolute focus on order entry and spreads in Futures hmmm .. how popular is this software? I thought

So then I decided to look more closely at who exactly is using this software.. and BANG!! WTF? man! ... GNI, Goldmans, BNP Paribas, Daiwa Bear Stearns and many others some with Worldwide licensing agreements!!!! thats the biggest hint Ive ever had about whats going on...

OK just read more about it, spreads are HUGE huge huge in the institutions and mathematically they arnt neccesarily concerned with up or down markets.. only changes in spreads!!.. for even less margin!!!.. thats thier edge...my decision is made.. My Focus is definitely a primary trading in Futures and Options spreads...phew.. thats narrowed it down a bit (so much choice.. almost too much choice)

Suddenly everything is making sense

Hi Paul,

I agree with you.

For example, Joe Ross says on his website that spreads trading is kept well hidden from the retail traders.

I would imagine lots of learning is required but should be very rewarding!

Fibonelli

 

[hrokling]

Return on margin is the measure.

I agree that it's pretty much the only objective measure, but when trading spreads it is also important to figure out what percentage of the your account you want to commit to a spread (with the margin not necessarily, or should I say hopefully, not being 100% of committed capital). Then, I'd say that the best measure is return on the portion of the capital comitted to the trade.

Example:
- Account size 100.000, divided into 10 portions of 10.000 each. This means you can do 10 different spreads at a time.
- Required margin of a spread is 500, but you're willing to let the trade go 1.000 against you before stopping it (stoploss).
- You don't want to risk more than 5% of the total account size on any trade, so 5.000 is max risk.
- Number of contracts in the spread should then be 3 (each way), as the max loss would be 4.500.

Now, let's say you end up making 3.000 per contract which times 3 equals 9.000 in profit. Return on margin is 600%, which is an interesting number of course. But I think it's more interesting to show that the return on committed capital is 90% (9.000 on 10.000). One can probably also make an argument that it's better to look at return vs risk - 2:1 (9.000 : 4.500).

The thing with looking at Return on Margin is that, while the number itself looks absolutely stunning, sometimes the margin can be very misleading as to the risk of the position if you calculate the historical volatility of the last 20 years of a spread.

This whole thing relates to portfolio theory, diversification between several spread trades, position sizing and stop loss and/or volatility - of which I am by absolutely no means even beginning to comprehend. But different traders will experience very different results with their account based upon how these things are handled.

 

[Paulds11]

hmm.. interesting post.. I wondered if anyone could shed more light on the timescales for various spreads... is it a feasible and widely held notion that one can Scalp the spreads intraday or it this simply not the mechanism or timescale to consider such options with spreads...?

Also, I am surprised that with all the information that the Exchanges supply regarding spreads and margins on those spreads, that here is not any decent information regarding suitable calculation and mathematical tools to manage the spread onece aplied.. it seems that too many platforms do not adequately calculate the dynamic profit, chart the spread properly... one could enter a spread and realise that the spread is working in the opposite direction, if that being the case I would presume that one could simply short the spread instrument once it is created.. but so far I see that only X_Trader alludes to solving this problem... this is what I mean by the "secrecy" in the markets regarding these spreads and management thereof..

 

[abi1818]

Hi Guys,

I just started a job as a day trader in euribor futures. I want to get an edge but I essentially dont understand the spread trading. Lets say I have the I have the price ladder for the following future contracts on my window: 1) Sep 09, 2) Dec 09, 3) Spread between Sep 09 - Dec 09.

Lets say the spread right now is - 0.50 (just for the sake of argument)

Questions:

1) If how are the two months correalated in futures trading and how can I find this out?
2) For what indicators do I have to look for in order to deside if the spread widens or narrows?
3) lets say i go 5 contracts long on Sep 09 and 5 contracts short on Dec09 (on each individual price ladder) how do i have an advantage from the Spread then?
4) Does Dec 09 go up, if Sep 09 goes up but with a time lag?
5) Which graphs are important for me and on what signals means what? (If the Bund 2 min graph goes up, does that mean future contracts will tend to go up)

I hope the questions are not to confusing, but I am just starting and my main objective is to get a feeling for the market. The company is very unorganised and no one gives a crap about another.

So please I hope somebody can help me...

 

[stusse]

Hi Guys,

I just started a job as a day trader in euribor futures. I want to get an edge but I essentially dont understand the spread trading. Lets say I have the I have the price ladder for the following future contracts on my window: 1) Sep 09, 2) Dec 09, 3) Spread between Sep 09 - Dec 09.

Lets say the spread right now is - 0.50 (just for the sake of argument)

Questions:

1) If how are the two months correalated in futures trading and how can I find this out?
2) For what indicators do I have to look for in order to deside if the spread widens or narrows?
3) lets say i go 5 contracts long on Sep 09 and 5 contracts short on Dec09 (on each individual price ladder) how do i have an advantage from the Spread then?
4) Does Dec 09 go up, if Sep 09 goes up but with a time lag?
5) Which graphs are important for me and on what signals means what? (If the Bund 2 min graph goes up, does that mean future contracts will tend to go up)

I hope the questions are not to confusing, but I am just starting and my main objective is to get a feeling for the market. The company is very unorganised and no one gives a crap about another.

So please I hope somebody can help me...

What place did you join?

Didn't they teach you anything?