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