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