Friday, August 20, 2021

SPREAD TRADE - - - - - Calendar or Inter Commodity

A big word attached to something becomes a "branded name" giving it a legitimacy and some unique status.

SPREAD is the difference measurement in value between 2 object/products.

This brings me to my MCE/O level Physics topic of "relative". We learnt about objects moving at different speeds and directions. When the 2 objects will collide if they are on the same path or when one object will overtake the other in the same direction ( different path).

Calendar spread and "Inter" Commodity spread are the common spreads traded either offered by the exchange or synthetically created if not offered.

The trade is about BUYING one leg and SELLING another leg either

1)within the same product group different months

or

2) different product groups of same months or different months

The spread is a derived product of 2 FUTURES values. The rise and fall of the Spread value will depend on the RATE of change of the 2 FUTURES values.

The Spread rise and fall can either be in synch with the Future rise and fall or the Spread rise and fall can be contrary Opposite to Future rise and fall.

The margin for spread is NORMALLY 25% of the Futures outright and long term (years/months) magnitude movement is less than Futures outright. This does NOT mean the spread movement is 25% of the Futures outright.

The Spread can be POSITIVE ... ZERO ... NEGATIVE

The spread can remain static while the futures prices keep rising or the spread can be static and the futures declining.

It is all about direction and relative relationships
 

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