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Spread
Scan Issue: July 18, 2007 - Volume 153
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Joe Ross Spread Trading Newsletter.Each week we present spread trading examples and opportunities in order to help you become a more professional spread trader.
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Today we consider a calendar spread: long March 08 Eurodollars and short September 07 Eurodollars (EDH8 – EDU7). After the strong down move in May 2007, the spread seems to be in a sideways range at the moment. Seasonality indicates the spread could move up in the next few weeks (app. 6/11 – 9/3). The July 07 low at 0.015 could be a good place for the initial stop.
Traders may want to enter the spread at a value of 0.12 or higher. Please ask your broker for the margin. Suggested risk is $300. Initial projected objective is $300, then a move higher.
On July 10 we told subscribers of our professional daily spreads & position trading newsletter Traders Notebook, "Consider entering an inter-market spread 50*SIU7 – 100*GCQ7 MOC tomorrow 07/11. Margin for the spread is $6,750 (no reduced margin). Suggested risk is $1,000. Initial projected objective is $1,000, then a move higher. Basis is seasonal (app. 7/20 – 7/30) and a RH. Comment: Be careful when trading inter-market metal spreads. They can move really fast (look what happened end of June)!"
Here's how we suggested managing this trade:
07/11 In?
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Questions or Comments? Please email us: support@spread-trading.com
Student's Question: "Andy, I have heard spread trading is less risky than outright futures trading. Is this true?"
Andy: Yes and no — it depends on what kinds of spreads we are talking about. Maybe we should put them into different categories:
High-risk, chaotic spreads: Spreads with each side in a different, unrelated market.
For example, Live Cattle – Emini S&P. These spreads don’t make much sense.High-risk spreads: Inter-market spreads like Feeder Cattle – Live Cattle; Euro – Japanese Yen; Wheat – Soybeans, and so on. Even if the two sides of the spread are related to each other, both sides can behave independently (i.e. Feeder Cattle can move up and Live Cattle down). These spreads can move even faster than a single outright futures position from time to time, especially when it comes to a limit up or down situation in one of the markets involved in the spread.
Mid-risk spreads: Intra-market or calendar spreads in two different crop years like December 07 Wheat – May 07 Wheat. Even if you trade the same market on both sides of the spread, these spreads can move fast because the contracts are in two different crop years. But they are much less sensitive in a limit situation than inter-market spreads.
Low-risk spreads: Intra-market spreads in the same crop year, like September 07 Corn – December 07 Corn. These spreads carry the least risk even in extreme situations.
Whenever you want to enter a spread, think about the relationship of each contract involved. But also have a look at the spread chart, to see how fast the spread has moved in the past. This should give you a good idea of what to expect in the future. Be extremely careful whenever it comes to a limit up or down situation.
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Disclaimer:
The Commodity Futures Trading Commission has asked us to advise you that trading spreads is complex and carries a high degree of risk. While there is opportunity for incredible wealth building, there is also the risk of losing even more than you invested. Of course, that's not unlike most other businesses. But informed traders are the best traders!