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5-Ways to Make Money with Spread Trading vs.
Only 2-Ways with Open Position Trading – BM
Commodity futures spread trading is fast becoming a lost
art among average traders. Most Account Executives (Commission Sales People)
seem not able to comprehend or really want to be bothered with spreads,
as open position trades normally generate commissions faster. With one
eye on the Lexus in the parking lot and another on the alimony payment
to ex-wife, the last thing the average salesman wants is a slow trading
spread.
However, much can be said for spreads. Let's compare
spreading advantages with open position trading.
In a naked long trade, the market has only one way to
go to make money, and that is up. In a naked short position, to make money,
the market must go down. Any other movement means a loss, even a "wash"
trade, because commissions still have to be paid.
In an average spread, with one sidelong and the other
side short, the market can produce a profit under the following conditions:
1. One side can move up and the other stay unchanged.
2. One side can move down and the other stay unchanged.
3. Both sides move up, but one side moves up more than the other.
4. Both sides move down, but one side moves down more than the other.
5. One side moves up and the other side moves down at the same time.
Most of the time, the margin requirements for spreads
are much less than the margin requirements for outright long or short
positions, and sometimes, because of the nature of the spread and the
seasonal factors involved, certain spreads are marked-to-the-market, which
means that margin is only required to makeup paper losses if they occur
in the spread.
Spreads are a blessing when markets go lock-limit up
or down in that you are able to exit if you wish. Naked longs cannot escape
a lock-limit down market, as there are no bids. Naked shorts cannot exit
a lock-limit up market since there are no offers. The relationship between
the legs of the spread is the only factor considered by the floor when
you're entering and exiting during lock-limit days, so the trade, though
not necessarily the best fill in the world, can be done over wailing and
gnashing of teeth of those caught in the trap!
When it is difficult to determine whether a particular
market is changing trend, comparing the back month's price action with
front month price action may be a good indicator of whether the market
is a bull or bear market. Chances are if the back months are performing
better than the front months, you are in a bear market. The reverse could
indicate a bull market environment. Spreading action may be justified
in such cases to the trader's benefit. It's amazing how few traders pay
attention to this rather obvious and readily activity.
The basic knowledge of seasonal trends can give the spreader
immense advantage at times. We know that Wheat is harvested in June and
July. Corn is harvested in the Fall. Isn't it possible to determine with
the help of charts to go long the last month of old crop Corn and Short
the first month of new crop Wheat sometime in the spring to take advantage
of this natural process? Of course, other factors may enter the picture,
such as planting intentions, supply/demand, etc., but the simple knowledge
of this spread possibility should be profitable each year.
Wouldn't it be a good idea to also look at the relationship
between different months in the same crop to weigh carrying charge premiums?
Much profit has been made in spreads that were at full carry by buying
the front month and shorting the back month in cases where carry is unusually
wide.
The relationship between different currencies, bonds
and notes, gold and silver, heating oil and unleaded gas, hogs and cattle,
and many other commodity futures contracts is a fascinating study! It's
much more interesting and much more profitable in relation to risk at
times compared to open position trading.
Once the trader gets involved in spreading and becomes
familiar with order placement and fundamental seasonal factors, he should
find that perhaps his open position trading improves. He is more aware
of the fundamentals and charts have more meaning.
His thought process is now expanded past the simplicity
of deciding whether to go long or short. His timing, because of his new
knowledge of seasonal spread factors is more precise. His ability to determine
trends is enhanced, and best of all; his bottom line performance in terms
of net profits in all his trading activities should show marked improvement!
I've covered only a few considerations in the preceding
paragraphs. There are many more, such as the consideration of the "personalities"
of the various trading pits, delivery points for different commodities
and their impact on prices, differences between contract sizes in inter-market
spreading, and whether a market is cash settled or subject to delivery.
All these factors influence spreading.
Learn as much as you can about spreads. I consider them
to be the secret to my longevity as a commodity futures trader! Good trading!
CTCN has many trading services and trader benefits to give you both
Trading Tools and Trading Knowledge you need to potentially make money!
Remember, if you can learn relatively simple and sound trading systems
and timeless trading methods, it can last you a lifetime and bring you
long-term financial freedom.
Great News! We offer many of our Commodity Traders Club News back-issues
on-line for the trader to read and gain free trading knowledge. Be sure
to take advantage of all the free information offered.
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