46 lines
3.2 KiB
Plaintext
46 lines
3.2 KiB
Plaintext
441
|
||
tHe COnCepts And MeCHAniCs OF spreAd trAding
|
||
3. Spreads often offer some protection against sudden extreme losses due to dra-
|
||
matic events that may spark a string of limit-up or limit-down moves counter to
|
||
one’s position (e.g., freeze, large export deal).
|
||
such situations are not all that infrequent,
|
||
and traders can sometimes lose multiples of the maximum loss they intended to allow (i.e., as
|
||
reflected by a protective stop) before they can even liquidate their positions.
|
||
in contrast, during
|
||
a time of successive limit moves, the value of a spread might not even change as both months
|
||
may move the limit. Of course, eventually the spread will also react, but when it does, the
|
||
market may well be past its frenzied panic stage, and the move may be gradual and moderate
|
||
compared with the drastic price change of the outright position.
|
||
4. a knowledge and understanding of spreads can also be a valuable aid in trading
|
||
outright positions. For example, a failure of the near months to gain sufficiently during a
|
||
rally (in those commodities in which a gain can theoretically be expected) may signal the trader
|
||
to be wary of an upward move as a possible technical surge vulnerable to retracement.
|
||
in other
|
||
words, the spread action may suggest that no real tightness exists. this scenario is merely one
|
||
example of how close observation of spreads can offer valuable insights into outright market
|
||
direction.
|
||
naturally, at times, the inferences drawn from spread movements may be mislead-
|
||
ing, but overall they are likely to be a valuable aid to the trader. A second way an understanding
|
||
of spreads can aid an outright-position trader is by helping identify the best contract month in
|
||
which to initiate a position.
|
||
the trader with knowledge of spreads should have a distinct advan-
|
||
tage in picking the month that offers the best potential versus risk. Over the long run, this factor
|
||
alone could significantly improve trading performance.
|
||
5. trading opportunities may sometimes exist for spreads at a time when none is
|
||
perceived for the outright commodity itself.
|
||
■ Types of Spreads
|
||
there are three basic types of spreads:
|
||
1. the intramarket (or interdelivery) spread is the most common type of spread and con-
|
||
sists of buying one month and selling another month in the same commodity. An example of an
|
||
intramarket spread would be long
|
||
december corn/short March corn. the intramarket spread
|
||
is by far the most widely used type of spread and will be the focus of this chapter’s discussion.
|
||
the intercrop spread is a special case of the intramarket spread involving two different
|
||
crop years (e.g., long an old crop month and short a new crop month). the intercrop spread
|
||
requires special consideration and extra caution. intercrop spreads can often be highly volatile,
|
||
and price moves in opposite directions by new and old crop months are not particularly uncom-
|
||
mon.
|
||
the intercrop spread may often be subject to price ranges and patterns that distinctly
|
||
separate it from the intracrop spread (i.e., standard intramarket spread).
|
||
2. the intercommodity spread consists of a long position in one commodity and a short
|
||
position in a related commodity. in this type of spread the trader feels the price of a given |