26 lines
1.7 KiB
Plaintext
26 lines
1.7 KiB
Plaintext
453
|
|
. . . many more people see than weigh.
|
|
—Philip Dormar Stanhope, Earl of Chesterfield
|
|
B
|
|
y definition, the intention of the spread trader is to implement a position that will reflect changes
|
|
in the price difference between contracts rather than changes in outright price levels. T o achieve
|
|
such a trade, the two legs of a spread must be equally weighted. As an obvious example, long 2
|
|
December corn/short 1 March corn is a spread in name only. Such a position would be far more
|
|
dependent on fluctuations in the price level of corn than on changes in the price difference between
|
|
December and March.
|
|
The meaning of equally weighted, however, is by no means obvious. Many traders simply assume
|
|
that a balanced spread position implies an equal number of contracts long and short. Such an assump-
|
|
tion is usually valid for most intramarket spreads (although an exception will be discussed later in this
|
|
chapter). However, for many intermarket and intercommodity
|
|
1 spreads, the automatic presumption
|
|
of an equal number of contracts long and short can lead to severe distortions.
|
|
Consider the example of a trader who anticipates that demand for lower quality Robusta coffee
|
|
beans (London contract) will decline relative to higher quality Arabica beans (New Y ork contract) and
|
|
Intercommodity
|
|
Spreads: Determining
|
|
Contract Ratios
|
|
Chapter 31
|
|
1 The distinction between intermarket and intercommodity spreads was defined in Chapter 30. An intermarket
|
|
spread involves buying and selling the same commodity at two different exchanges (e.g., New Y ork vs. London
|
|
cocoa); the intercommodity spread involves buying and selling two different but related markets (e.g., wheat vs.
|
|
corn, cattle vs. hogs). |