38 lines
2.8 KiB
Plaintext
38 lines
2.8 KiB
Plaintext
450
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A Complete Guide to the Futures mArket
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■ As a general rule, traders should avoid trading spreads in markets in which they are unfamiliar
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with the fundamentals.
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■ Check the open interest of the months involved to ensure adequate liquidity, especially in spreads
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involving distant back months. A lack of liquidity can significantly increase the loss when getting
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out of a spread that has gone awry. At times, of course, a given spread may be sufficiently attrac-
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tive despite its less-than-desirable liquidity.
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nevertheless, even in such a case, it is important that
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traders be aware of the extra risk involved.
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■ place a spread order on a spread basis rather than as two separate outright orders. some traders
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place their spread orders one leg at a time in the hopes of initiating their position at a better price
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than the prevailing market level.
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such an approach is inadvisable not only because it will often
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backfire, but also because it will increase commission costs.
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■ When the two months of the spread are very close in price, extra care should be taken to specify
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clearly which month is the premium month in the order.
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■ do not assume that current price quotations accurately reflect actual spread differences. time lags
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in the buying and selling of different contracts, as well as a momentary concentration of orders in
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a given contract month, can often result in outright price quotations implying totally unrepresen-
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tative spread values.
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■ do not liquidate spreads one leg at a time. Failing to liquidate the entire spread position at one
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time is another common and costly error, which has caused many a good spread trade to end in
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a loss.
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■ Avoid spreads involving soon-to-expire contracts. expiring contracts, aside from usually being
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free of any price limits, are subject to extremely wide and erratic price moves dependent on
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technical delivery conditions.
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■ do not assume the applicability of prior seasons’ carrying charges before initiating a limited-risk
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spread. Wide price swings and sharply fluctuating interest costs can radically alter carrying costs.
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■ try to keep informed of any changes in contract specifications, since such changes can substan-
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tially alter the behavior of a spread.
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■ properly implemented intercommodity and intermarket spreads often require an unequal num-
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ber of contracts in each market. the methodology for determining the proper contract ratio be-
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tween different markets is discussed in the next chapter.
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■ do not use spreads to protect an outright position that has gone sour—that is, do not initiate an
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opposite direction position in another contract as an alternative to liquidating a losing position.
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in most cases such a move amounts to little more than fooling oneself and often can exacerbate
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the loss. |