Add training workflow, datasets, and runbook
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CHAPTER 31
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Index Spreading
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In this chapter, we will look at strategies oriented toward spreading one index against
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another. This may be done with either futures or options. In some cases, this is almost
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an arbitrage because the indices track each other quite well. In others, it is a high
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risk venture because the indices bear little relationship to each other. In any case, if
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the futures relationship between the two indices is out of line, one may have an extra
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advantage.
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INTER-INDEX SPREADING
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There are general relationships between many stock indices, both in the United
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States and worldwide. The idea behind inter-index spreading is often to capitalize on
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one's view of the relationships between the two indices without having to actually
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predict the direction of the stock market. Note that this is often the philosophy
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behind many option spreads as well.
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Sometimes an analyst will say that he expects small-cap stocks to outperform
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large-cap stocks. This analyst should consider using an inter-index spread between
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the S&P 500 Index and the Value Line Index (which contains many small stocks), or
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perhaps between the S&P and a NASDAQ-based index. If he buys the index that is
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comprised of smaller stocks and sells the S&P 500 Index, he will make money if his
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analysis is right, regardless of whether the stock market goes up or down. All he wants
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is for the index he is long to outperform the index he is short.
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Occasionally, the futures or options on these indices are mispriced in compar
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ison to the way the indices are priced. When this happens, one may be able to cap
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italize on the pricing discrepancy. At times, the spread between the index products
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579
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