35 lines
1.8 KiB
Plaintext
35 lines
1.8 KiB
Plaintext
698 Part V: Index Options and Futures
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The spreader is not attempting to predict the overall direction of prices. Rather,
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he is trying to predict the differential in prices between the July and September con
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tracts. He doesn't care if beans go up or down, as long as the spread between July and
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September goes his way.
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Example: A spread trader notices that historic price charts show that if September
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soybeans get too expensive with respect to July soybeans, the differential usually dis
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appears in a month or two. The opportunity for establishing this trade usually occurs
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early in the year - February or March.
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Assume it is February 1st, and the following prices exist:
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July soybean futures: 600 ($6.00/bushel)
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September soybean futures: 606
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The price differential is 6 cents. It rarely gets worse than 12 cents, and often revers
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es to the point that July futures are more expensive than soybean futures - some
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years as much as 100 cents more expensive.
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If one were to trade this spread from a historical perspective, he would thus be
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risking approximately 6 cents, with possibilities of making over 100 cents. That is
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certainly a good risk/reward ratio, if historic price patterns hold up in the current
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environment.
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Suppose that one establishes the spread:
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Buy one July future @ 600
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Sell one September future @ 606
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At some later date, the following prices and, hence, profits and losses, exist.
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Futures Price
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July: 650
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September: 630
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Total Profit:
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Profit/Loss
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+50 cents
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-24 cents
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26 cents ($1,300)
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The spread has inverted, going from an initial state in which September was 6
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cents more expensive than July, to a situation in which July is 20 cents more expen
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sive. The spreader would thus make 26 cents, or $1,300, since 1 cent in beans is
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worth $50. |