580 Part V: Index Options and Futures 
on two indices can trade at significantly different price levels from the spread 
between the two indices themselves. When this happens, an inter-index spread 
becomes feasible. 
The margin requirements for these spreads are often reduced because margin 
rules recognize that futures on one index can be hedged by futures on another index. 
The general rule of thumb as far as selecting a futures spread to establish 
between two indices is to compare the price difference in the respective futures to 
the actual price difference in the indices themselves. If the difference in the futures 
is substantially different from the difference in the cash prices of the indices, then 
one would sell the more expensive future and buy the cheaper one. Several specific 
spreads are discussed in this chapter. 
Regardless of whether one is entering into the spread because he is trying to 
predict the relationships between the cash indices, or because he knows the two 
respective futures are out of line, he must decide in what ratio he wants to establish 
the spread. There are two lines of thinking on this subject. The first is to merely buy 
one future and sell one future (on two different indices, of course). Many chart books 
and spread history charts are graphed in this manner - they compare one index to 
another index on a one-for-one basis. 
Example: A spreader wants to buy the ZYX Index futures and sell ABX futures 
against them. They are both trading in units of $500 per point, but ZYX is currently 
at 175.00 while ABX is at 130.00. Thus, the current differential is 45.00 points. This 
spreader would want the spread to widen to something larger in order to make 
money. The following profit table shows how he could make a $2,500 profit if the 
spread widens to 50.00 points, no matter which way the market goes. 
Market ZYX ZYX ABX ABX Total 
Direction Price Profit Price Profit Profit 
up 185.00 +$5,000 135.00 -$2,500 +$2,500 
neutral 177.00 + 1,000 127.00 + 1,500 + 2,500 
down 160.00 - 7,500 110.00 + 10,000 + 2,500 
Notice that in each case, the difference in the prices of the indices ZYX and ABX is 
50.00 points. The profit is the same regardless of whether the general stock market 
rose, was relatively unchanged, or fell. 
The $2,500 profit is the five points of profit that the spreader makes by buying 
the spread of 45.00 and selling it at 50.00 (5.00 points x $500 per point = $2,500). 
The second approach to index spreading is to use a ratio of the two indices. This 
approach is often taken when the two indices trade at substantially different prices.