Forex futures spread trading
The net difference is referred to as the Spread. For example, July 13 Sugar is trading at If you subtract the two prices from each other you will see that July13 Sugar is trading at a discount of. If a trader bought this Spread at.
If the value of the Spread were to narrow down to. The Spread value changes daily based on supply or demand of both contract months. If somebody thought prices were going higher in the Sugar market typically, but not always the trader would buy July13 Sugar and sell October13 Sugar. If they thought prices were going lower they would sell the July13 Sugar and buy the October13 Sugar. The reasons to place the trade either way would be based on if the market needed Sugar immediately or is it being put in storage for later delivery.
These types of Spreads are the least risky of the two. The margin capital deposited with clearing firm used to cover any losses a trader may have while in the trade is less expensive due to the lower volatility and risk. These Spreads tend to be much more volatile and require higher overnight margin for each Spread. Now that we are a little more familiar with what a Spread is and the different types of Spreads, just how do we determine our profit or loss when the Spread value changes?
Keep in mind that when you are trading Spreads you are still trading a Futures contract, actually you are trading 2 Futures contracts one long and one short. The only thing you need to know to figure your profit or loss is what is the tick or point value in dollars for the Futures contacts in the Spread you are trading.
In our example of the Sugar Spread above we can calculate our profit or loss by looking up the tick value minimum amount the price can fluctuate and then the dollar value of that minimum tick. The first Sugar Spread we saw was purchased at. The second Sugar Spread we saw was again purchased at. The difference between what we paid for the Spread and the last trade is.
Once you enter a Spread then each day you will subtract the two contract prices from one another and compare the net difference the Spread to where you purchased the Spread. The math is exactly the same for all Intra-Commodity Spreads. Since you are both long and short the same contract just different months. The contract expiry date is fixed at purchase. If a trader wishes to hold a position in the commodity beyond the expiration date, the contract can be "rolled over" via a spread trade, neutralizing the soon to expire position while simultaneously opening a new position that expires later.
Intercommodity spreads are formed from two distinct but related commodities, reflecting the economic relationship between them. Option spreads are formed with different option contracts on the same underlying stock or commodity.
There are many different types of named option spreads, each pricing a different abstract aspect of the price of the underlying, leading to complex arbitrage attempts. Not to be confused with Swap spreads , IRS Spread trades are formed with legs in different currencies but the same or similar maturities.
Two notable examples, U. Dirham and Saudi Riyal interest rate swaps, are quoted in the inter-bank market as spreads to US dollar interest rate swaps. From Wikipedia, the free encyclopedia. Bucket shop stock market Contract for difference Forex Financial betting Spread betting. Retrieved from " https: All articles with unsourced statements Articles with unsourced statements from June Pages using div col with deprecated parameters. Views Read Edit View history. This page was last edited on 16 June , at