Thursday, September 23, 2010

spreads : 5 ways to profit

Here is timing for entering spreads ( both long and short spreads )
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MRCI to PHP to DYgraphs
premium data -> csv files ( via PHP program )
MRCI to csv files (PHP program )
use PHP and DYcharts to pull those data for on demand sepread months and MRCI seasonal tables.

0) we need to have MRCI data stored in csv files and let PHP program parse and make it ready for web front end Dygraphs to display spread chart between any given months.
b) display MRCI table for a given CL seasonal like hardcopy table and sortable with
netprofit ( as % of entry price example: (80 - 75 )/75 * 100 = 5/75 * 100 = 20/3 = 7% so that is 1% is 75 cents , so 7% is $5 -> $5000 )
c) do not just use MRCI pure netprofit dollar , it does not tell rise from 25 to 30 in 2004 is not same as above 75 to 80 : 30 - 25 /25 = 5/25 * 100 = 20% wow that is diff even thought both are $5k . So this kind of % gives good probability indicator by taking avarge % increase of all 15 years ..
d) so this avg. % of netprofit motivates which seasonal spread to take
e) MRCI did not have any outright SHORT trades, only gave LONG trades. we need to construct SHORT trades also based on monthly charts. For example for NOVEMBER contract we have seasonal DRAG for this contract and this NOV peaked in by mid august .. with out knowing this we put LONG trades on OCT/NOV contracts ...
f) so having SHORT trades also gives when NOT to take LONGS based on seasonal DRAG and also gives good timing to position with calls/puts buys in adavcnce as required ..

g) see this image and related our post sakeda guy, see important of having Median , median gives better picture than avarage. see the standard deviation also and see where the 'Median profit ' is on SD bell cure . Is it at 20% percentile or 70% etc..

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9/30/10: today CL up 78 to 80.15 on top of yesterday up from 76 to 78 . basically 9/29 gave a range breakout to toside from 74 to 76 range for last 10 days .
1) so these 2 days cuased DEC 2012/DEC 2011 spread lost seems 15 + 15 : 30 cents
and DEC 10/NOV 10 spread lost 50 cents in 2 days , no spread trades at $1 (few days ago $1.5 ) and when OCT 10/NOV 10 at time of OCT expiry on 9/22 the spread is $2.25

2) it seems even for LONG 1 yr spread like DEC 12/DEC 11 , it is better to enter when current month is at its peak , you get lower price and the time that is next 1 month is in your favour . I think this kind of situation will surly gives 30 cents/month for LONG spreads when entered at this time.

3) since we have breakout on 9/29 , so it good first day of break , this day is good to buy CL 82 call preparing for 82 short of NOV contract in few days ..

4) on MRCI has a 7/10 to 9/30 NOV Long CL trade, 7/10 price of NOV is 75 , so there is good chance it will do good this year , so it proved .. hindsight could CL Long would have been good entry on 9/26 based on this seasonal ... ( even with a 74 put as protection .. )

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as: 5 ways esp. with OIL long leg/short leg can act in 1 year in one of these 5 ways ..


Why Use Futures Spreads?


There are two main reasons why futures spreads are being used; Increase In Profit Avenues and Lowering of Margin Requirement and risk.

Increasing Avenues of Profit
While going long or short futures contracts outright only earn you profits when the futures contracts you traded move in your predicted direction, futures spreads are really capable of profiting in 5 different ways:

1. When the long leg rises and short leg falls. This usually happens when the basis is extremely large on the far term futures contracts and the underlying asset moves up slowly.

2. When the long leg rises and the short leg remained unchanged.

3. When the long leg rises and short leg rises at a lower rate. This is usually what happens when near term futures with higher volatility is bought and far term futures with lower volatility is shorted.

4. When the short leg falls faster than the long leg.

5. When the long leg remains unchanged and short leg falls.

As you can see above, futures spreads greatly increases the avenues of profits even though it does not have the explosive potential of outright futures speculative positions. In fact, all of the above 5 points say only one thing and that is, futures spreads profit through the price difference of the long and short leg instead of the price action of the underlying itself!

Lowering Margin and Risk
Apart from increasing the avenues of profit, futures spreads are valued for their ability to limit risk. Futures spreads are really trading the difference in price (the "Spread") between the long and short legs and such price difference tends to trade within a determinable range! That's right, this makes trading futures spreads a lot more predictable and subject the futures trader to much lower risk.

Apart from lowering the risk involved, putting on a spread also decreases your initial margin requirement dramatically. You could pay up to ten times lesser initial margin for a futures spread versus an outright position. This will enable you to put on a lot more positions for greater ROI! In fact, futures spreads are so effective that most futures brokers quote futures spread position directly for trading as if it is one asset on its own!



Types of Futures Spreads


There are 3 broad categories of futures spreads, the Intramarket Spread, Intermarket Spread as well as the Inter-EXchange Spread, which can then be categorised by function into either Bull Spread, Bear Spread, calendar spread or Butterfly Spread as well as by specific commodities such as the Crush Spread in soybean futures trading and the Crack Spread in crude oil futures trading.


Intramarket Spreads
Also known as "Calendar Spreads", "Intracommodity Spreads" or "Interdelivery Spreads". These are futures spreads using futures contracts of the same underlying but different expiration months. Intramarket spreads trade the price difference between futures contracts of different months on the same underlying. Due to carrying charges, there is usually a price range within which this difference can be thus making it easy and predictable to trade such futures spreads, using a bull spread when price difference is low and using a bear spread when price difference is high.

Another form of Intramarket Spreads is the "Intercrop Spread" which is a futures spread consisting of futures contracts of different harvest periods or "Crop Years".


Intermarket Spreads
Also known as the "Intercommodity Spread", are futures spreads using futures contracts of different but somewhat related underlying assets. Examples of related underlying assets commonly used in intermarket spreads are Gold/Silver, Soybean/Corn, Wheat/Corn, Soybean/Soybean Meal and Crude Oil/Heating Oil. Intermarket spreads are not only good for speculating on the price difference between two seasonally related products such as Gold and Silver, these futures spreads are also used by processors of raw material for locking in the profit margin involved in turning a raw material such as Soybean into its products such as Soybean Meal.

The huge depression in the profit margin of oil refineries in May 2010 demonstrated the importance of locking in profit margin through the crack spread, which is an intermarket spread between crude oil futures and gasoline as well as heating oil futures.


Interexchange Spreads
Also spelled as "Inter-exchange Spread". These are futures spreads consisting of futures contracts of the same underlying traded in different exchanges such as the Chicago Board of Trade (CBOT) and Kansas City Board of Trade (KCBOT). An example of an Interexchange spread would be simultaneously Long December Chicago Board of Trade (CBOT) Wheat, and Short an equal amount of December Kansas City Board of Trade (KCBOT) Wheat.

There are two main purposes in using interexchange spreads. One of them is to take advantage of price discrepancy in the same futures contract traded in different exchanges and the other is when a better price is available in another exchange for putting on a calendar spread.


Bull Spreads
These are futures spreads that are structured to speculate on a spread price narrowing when the underlying asset is expected to move higher. This is done by being long on near term futures contracts and short on far term futures contracts. Learn more about Bull Spreads.


Bear Spreads
These are futures spreads that are structured to speculate on a spread price widening when the underlying asset is expected to move lower. This is done by being short on near term futures contracts and long on far term futures contracts. Learn more about Bear Spreads.


Calendar Spreads
These are any futures spreads that go long and short on futures contracts of different expiration months. In fact, there are calendar spreads for every of the three main broad categories of futures spreads. In fact, both Bull Spreads and Bear Spreads are calendar spreads as well.


Butterfly Spreads
These are futures spreads that consist of three legs instead of the traditionally used two legged futures spreads. It is a combination of a bull spread and a bear spread on the same underlying asset as a low volatility spread speculating on the spread difference of the futures contracts involved when the underlying asset is remaining relatively stagnant.

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