Spread
Trading ...
By
Ian Plasto
Spreading the markets, it is
assumed by most that you need to be a computer whiz kid, this could
not be further from the truth. All that is required is a fairly basic
understanding of how the futures markets work. If you are sick of
the highly volatile face of the markets then spreading could be right
for you.
1.What is a spread?
2.What are your risks?
3.What is the margin requirement?
4.How do I place a spread order?
5.How do I identify a trade?
1. A spread, simply,
is buying in the near month and selling the next month out, or of
course it could be done the other way around. You could also do
the second leg in any other month and not the next one out. For
a more complicated spread you could buy in one market and sell in
another, e.g. the three-year bonds against the ten-year bonds, however
for this paper we will stick to the basics. The 90-day bank bills
and the share price index.
2. As opposed to
a straight buy or sell in the futures markets the volatility in
spread trading is only a fraction of the futures. You can still
lose money but you will be able to make a more informed opinion
as far as your exit is concerned. The average trade should be looked
at in weeks rather than days or even hours. Because of the lower
risks and lower volatility the common mistake is to trade in much
larger volumes, this of course is not the right thing to do, as
the increased volume increases the risk.
3. With the spi
the initial margin for a futures contract is $3,000. The initial
margin for a spi spread is only $250.You may think great I can do
12 lots with my $3000, this is of course true, as then you will
be looking at 12x$25 per point move or $300 per point move. In the
bank bill market the initial margin is $700 as opposed to a spread
cost of $300.
4.To place a spread
order you will for starters have to open a trading account with
a futures broker. The actual wording would be; I would like to place
a positive sept/dec spread for 1 or 2 etc lots, in the spi at 12
points. The broker will know exactly what you are trying to do.
In this case you would be buying 2 September futures contracts and
simultaneously selling 2 December futures contracts 12 points under.
You would in this case be hoping the September rallies whilst the
December contract stays still or even better falls.
5.There are many
ways to identify what are the best spread trades, the main are,
seasonal, these trades are ones that occur at approximately the
same time every year, and fundamental, if you for instance think
that the Reserve Bank is going to do something with interest rates,
you can trade the bank bills contract.
