463
SPREAd TRAdING IN SToCK INdEx FuTuRES
which has a contract value of 100 times the index, is trading at 1,150 (a contract value of $115,000), 
the contract value ratio (CVR) of Nasdaq to Russell futures would be equal to:
CVR2 04 ,300 /1 00 1,150 07 478=× ×=() () .
Therefore, the contract ratio would be equal to the inverse of the contract value ratio: 
1/0.7478 = 1.337. Thus, for example, a spread with 3 long (short) Russell contracts would be bal-
anced by 4 Nasdaq short (long) contracts: 3 × 1.337 = 4.01.
Because some stock indexes are inherently more volatile than other indexes—for example, smaller-
cap indexes tend to be more volatile than larger-cap indexes—some traders may wish to make an 
additional adjustment to the contract ratio to neutralize volatility differences. If this were done, the 
contract ratio defined by the inverse of the contract value ratio would be further adjusted by multiply-
ing by the inverse of some volatility measure ratio. 
one good candidate for such a volatility measure is 
the average true range (ATR), which was defined in Chapter 17. As an illustration, if in the aforemen-
tioned example of the Nasdaq 100/Russell 2000 ratio, the prevailing ATR of the Nasdaq 100 is 0.8 
times the ATR of the Russell 2000, then the Nasdaq/Russell 2000 contract ratio of 1.337 would be 
further adjusted by multiplying by the inverse of the ATR ratio (1 / 0.8 = 1.25), yielding a contract 
ratio of 1.671 instead of 1.337. If this additional adjustment is made, then a spread with 3 long (short) 
Russell contracts would be balanced by 5 short (long) Nasdaq contracts: 3 × 1.671= 5.01.
It is up traders to decide whether they wish to further adjust the contract ratio for volatility. For the 
remainder of this chapter, we assume the more straightforward case of contract ratios being adjusted 
only for contract value differences (i.e., without any additional adjustment for volatility differences).
The four most actively traded stock index futures contracts are the E-mini S&P 500, E-mini 
Nasdaq 100, E-mini 
dow , and the Russell 2000 Mini. There are six possible spread pairs for these 
four markets:
 ■ E-mini S&P 500 / E-mini dow
 ■ E-mini S&P 500 / E-mini Nasdaq 100
 ■ E-mini S&P 500 / Russell 2000 Mini
 ■ E-mini Nasdaq 100 / E-mini dow
 ■ E-mini Nasdaq 100 / Russell 2000 Mini
 ■ E-mini dow / Russell 2000 Mini
Traders who believe a certain group of stocks will perform better or worse than another group 
can express this view through stock index spreads. For example, a trader who expected large-cap 
stocks to outperform small-cap stocks could initiate long E-mini S&P 500/short Russell 2000 Mini 
spreads or long E-mini 
dow/short Russell 2000 Mini spreads. A trader expecting relative outperfor-
mance by small-cap spreads would place the reverse spreads. As another example, a trader expecting 
relative outperformance by technology stocks might consider spreads that are long the tech-heavy 
Nasdaq 100 index and short another index, such as long E-mini Nasdaq 100/short E-mini S&P 500